Working Paper: NBER ID: w4586
Authors: A. Mitchell Polinsky; Steven Shavell
Abstract: Should the level of liability imposed on an injurer be based on the harm he caused or instead on the gain he obtained from engaging in the harmful act? The main point of this article is that there is a strong reason to favor liability based on harm rather than gain when account is taken of the possibility of legal error. Notably, even a small underestimate of gain can lead an injurer to commit a harmful act when the harm greatly exceeds his gain, causing a large social loss. In contrast, a comparable error in the estimate of harm will not lead an injurer to engage in the harmful act when the harm significantly exceeds his gain. The general superiority of harm-based liability is shown to hold under the rules of negligence and strict liability and regardless of whether potential injurers know the error that will be made.
Keywords: liability; harm; gain; legal error; deterrence
JEL Codes: K13; K41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Liability Type (K13) | Injurer Behavior (K42) |
| Legal Error (K40) | Injurer Behavior (K42) |
| Magnitude of Harm (H84) | Injurer Behavior (K42) |
| Harm Measurement (I12) | Decision to engage in harmful acts (D91) |
| Observational Errors (C90) | Decision-making regarding harmful acts (D91) |