Econ 522 Economics of Law Dan Quint Fall 2012 Lecture 18

So far in tort law…

So far… We’ve introduced a simple model, and examined incentives for precaution and activity We’ve assumed “system is implemented perfectly” Damages = actual harm done Standard for negligence = efficient level of precaution Today What happens when the system is not implemented perfectly? What happens when world is more complicated than our simple model?

Effect of Errors

Strict liability versus negligence Negligence rules lead to efficient precaution by both sides But strict liability leads to efficient activity level by injurers Over course of 1900s, strict liability rules became more common – especially for U.S. manufacturers Why?

Strict liability versus negligence: information Relatively easy to prove harm and causation Harder to prove negligence If negligence is hard enough to prove, injurers might avoid liability altogether… …in which case they have no incentive to take precaution “Negligence requires me to figure out the efficient level of care for Coca-Cola; strict liability only requires Coca-Cola to figure out the efficient level of care” The answer may have to do with information It’s relatively easy to prove harm and causation A coke bottle explodes and takes out my left eye Clearly, I got hurt; and clearly, the bottle did it. But it’s very hard to prove that Coca-Cola was negligent in their bottling process I’d have to understand their whole manufacturing process understand the likelihood of accidents how the likelihood of accidents responds to precautionary measures they could have taken how much those actions would have cost and so on. Under a negligence rule, it might be too hard to prove negligence And so under a negligence rule, the manufacturer might not have to take precautions, because they know they can avoid liability anyway. On the other hand, under strict liability, the company bears the cost of accidents So it faces the incentive to reduce accidents directly, not just avoid having appeared negligent To put it another way, negligence requires me to figure out the efficient level of care Coca-Cola should have taken; strict liability only requires Coca-Cola to figure out the efficient level of care If Coca-Cola has better knowledge of their manufacturing process than I do, this might be better. And if manufacturing processes became more complex and technical over the course of the 1900s, this may explain why strict liability rules became more common

Errors and uncertainty in evaluating damages Random mistakes Damages could be set too high or too low, but on average are correct Textbook calls these uncertainty Systematic mistakes Damages are set incorrectly on average – consistently too high, or consistently too low Textbook calls these errors This leads us to the topic of errors and uncertainty in evaluating damages For now, let’s put aside the question of whether or not someone is liable, and think only about the problem of calculating the amount of damages owed There are two types of mistakes a court can make: systematic mistakes, and random mistakes Random mistakes mean that, if an accident caused $10,000 in harm, the court may end up setting damages either higher or lower than $10,000, but on average will get it right Systematic mistakes are when damages, on average, are set incorrectly – that is, they’re either biased to be consistently too high, or consistently too low C and U refer to systematic mistakes as errors, and to random mistakes as uncertainty

Effect of errors and uncertainty under strict liability Strict liability rule: injurer minimizes wx + p(x) D Perfect compensation: D = A Leads injurer to minimize social cost wx + p(x) A Under strict liability, random errors in damages have no effect on incentives Injurer only cares about expected level of damages As long as damages are right on average, injurers still internalize cost of accidents, set efficient levels of precaution and activity First, let’s look at the effects of errors under a strict liability rule Under a strict liability rule, the injurer minimizes the sum of two things: cost of precaution, plus expected damage payments (or, wx + p(x) D) (With perfect compensation, damage payments = cost of accidents, and so the injurer minimizes the total social cost of accidents.) Random errors in damages awarded have no effect on injurer incentives under a strict liability rule This is because the injurer is only concerned with the expected level of damages he will have to pay As long as damages are right on average, he will still internalize the expected cost of accidents, and still take the same level of precaution On the other hand, systematic errors in calculating damages will skew the injurer’s incentives If damages are consistently set too low, then the injurer will internalize less than the entire social cost of accidents; so precaution will be set too low. (DRAW IT.) If damages are consistently set too high, the injurer will internalize more than 100% of the social cost of accidents, so precaution will be set too high So under strict liability, systematic errors in setting damages will cause the injurer’s precaution level to respond in the same direction as the error random errors in setting damages will have no effect

Effect of errors and uncertainty under strict liability $ wx + p(x) D p(x) D wx + p(x) A On the other hand, systematic errors in calculating damages will skew the injurer’s incentives Consider our graph before – expected cost of accidents, cost of precaution, total social cost If damages are consistently set too low, we get a new curve – expected level of damages, p(x) D, which is below p(x) A And the private cost to the injurer, wx + p(x)D, is lower than the social cost And most importantly, it bottoms out at a lower level Damages which are consistently set too low lead the injurer to internalize less than the entire social cost of accidents; so precaution will be set too low. If damages were consistently set too high, the opposite would happen The injurer will internalize more than 100% of the social cost of accidents And precaution will be set too high So under strict liability, systematic errors in setting damages will cause the injurer’s precaution level to respond in the same direction as the error random errors in setting damages will have no effect wx p(x) A x x* Precaution (x)

Effect of errors and uncertainty under strict liability random errors in setting damages have no effect systematic errors in setting damages will skew the injurer’s incentives if damages are set too low, precaution will be inefficiently low if damages are set too high, precaution will be inefficiently high failure to consistently hold injurers liable has the same effect as systematically setting damages too low if not all injurers are held liable, precaution will be inefficiently low So under strict liability, random errors in setting damages will have no effect systematic errors in setting damages will cause the injurer’s precaution level to respond in the same direction as the error Another way the court could err is to fail to find injurers liable when it should If the probability of being found liable is less than 100%, this has the same effect as lowering the expected level of damages that the injurer has to pay The injurer is indifferent between paying $10,000 in damages half the time, or paying $5,000 in damages for sure. So a failure to consistently hold injurers liable has the same effect as a systematic error in setting damages too low Under strict liability, systematic failures to hold all injurers liable leads to less injurer precaution

What about under a negligence rule? $ wx + p(x) D wx + p(x) A p(x) D wx Recall how a negligence rule works: Injurers are responsible for accidents if they took less than the legally required level of precaution So for x to the left of the threshold, private cost = social cost Injurers are not liable if they took at least the required level of precaution So the to right of the threshold, private cost is only the cost of precaution Which leads injurers to take the correct level of precaution Suppose damages are systematically set too low Again, we get a new curve, expected damages, p(x) D, lower than the true one We can graph wx + p(x) D Under a liability rule, the injurer owes wx + p(x) D if he’s negligent And wx if he’s not So as long as the difference between A and D is not too great, the error has no effect on precaution – the injurer still minimizes private costs by taking efficient precaution If damages are systematically set too high, the same thing happens – costs will be too high for injurers who are negligent, but correct for injurers who are not, so injurers will still take efficient precaution, to avoid liability So “modest” errors – either systematic or random – in setting damages will have no effect on precaution under a negligence rule Under a negligence rule, modest errors in setting damages will not affect injurer precaution. Similarly, occasional failures to hold negligent injurers liable will also not affect injurer precaution, as long as they are occasional If you have a 90% chance of being held liable when negligent, it’s the same as being charged 90% of the proper level of damages; it may not be enough to change your behavior under a negligence rule. Of course, large enough errors in either measure could cause the p(x) D curve to dip below the level of w x*, in which case they would have an effect. (C and U also point out that these errors can be thought of as court errors in setting appropriate damages, or as injurer errors in predicting the level of damages. Again, neither one leads to a change in precaution level under a negligence rule, so long as the errors are not too large.) p(x) A xn = x* x Under a negligence rule, small errors in damages have no effect on injurer precaution

What about errors in setting xn? $ wx + p(x) A wx Under a negligence rule, in addition to calculating damages, the court also has to rule on whether the legal standard of care was met that is, the court has to compare the care the injurer took, x, to the legal standard, xn, which we hope is set equal to the efficient level, x* Systematic errors in the standard of care have a very direct effect on injurer precaution In general, under a negligence rule, the injurer’s level of precaution responds exactly to systematic court errors in setting the legal standard (DRAW IT) p(x) A xn x* xn x Under a negligence rule, injurer’s precaution responds exactly to systematic errors in setting the legal standard

What about random errors in setting xn? $ wx + p(x) A wx What about random errors? p(x) A x* x x Under a negligence rule, random errors in the legal standard of care lead to increased injurer precaution

To sum up the effects of errors and uncertainty… Under strict liability: random errors in setting damages have no effect systematic errors in setting damages will skew the injurer’s incentives in the same direction failure to consistently hold injurers liable lead to less precaution Under negligence: small errors, random or systematic, in setting damages have no effect systematic errors in the legal standard of care have a one-to-one effect on precaution random errors in the legal standard of care lead to more precaution So… when court can assess damages more accurately than standard of care, strict liability is better when court can better assess standards, negligence is better when standard of care is vague, court should err on side of leniency To sum up everything we’ve learned about errors and uncertainty… Given these results, when courts are able to assess damages more accurately than standards of care, a strict liability rule is better when a court can assess standards more accurately than damages, a negligence rule is better also, when the standard of care is vague – that is, when there is uncertainty about what does and does not constitute negligence – the court should err on the side of leniency, so as not to further aggravate the problem of excessive precaution. (The book does a little aside on “bright-line” rules, like speed limits, versus vague standards, like “don’t drive recklessly”. In certain settings, laws won’t be enforced if they’re overly vague. Off-topic a bit, but California helmet law.)

What about relative administrative costs of the two systems? Negligence rules lead to longer, more expensive trials Simpler to just prove harm and causation But negligence rules lead to fewer trials Not every victim has a case, since not every injurer was negligent Unclear which system will be cheaper overall We can think quickly about the relative costs of administering the different liability rules Obviously, it’s simpler to prove just harm and causation than to prove harm, causation, and negligence So once a case goes to court, we expect the administrative costs to be higher under a negligence rule than under strict liability (More time spent, more witnesses, etc.) On the other hand, under a negligence rule, many victims will know they have no case, and therefore not bring a lawsuit at all Under a strict liability rule, every accident victim is entitled to damages, so there will be more lawsuits So strict liability will lead to more cases, but easier cases So it’s not clear which will be cheaper (Obviously, a rule of no liability leads to lower administrative costs than either, since there’s no work to be done) There is also a tradeoff between rules (such as the legal standard of care) which are tailored to individual situations, versus broad, simple rules that apply to many situations As we’d expect, broad, simple rules are cheaper to create and enforce, but will not create perfect incentives in every situation More specific, detailed, “tailored” rules will be more costly to create and enforce, but will create more efficient incentives

One other point having to do with errors Negligence with a defense of contributory negligence was dominant liability rule in common law countries Negligent injurer is liable, unless victim was also negligent Example: a car going 60 mph hits a car going 35 in a 30-mph zone Since victim was also negligent, injurer is not liable Last 40 years, most U.S. states have adopted a comparative negligence rule Usually through legislation, sometimes through judicial decision Appealing from fairness point of view But any negligence rule leads to efficient precaution So how do we explain the move? I also want to go back to the rule of comparative negligence For a long time, negligence with contributory negligence was the dominant liability rule in most of the common law countries (Define) However, in the last 40 years, most states have adopted comparative negligence for non-product-related accidents. (This has generally been done by legislation, although in some cases by judicial decision.) Under negligence with contributory negligence, a negligent victim could not collect any damages, even if the injurer was negligent and even if his own negligence was very minor in comparison. The book gives the example of a car going 35 in a 30-mph zone colliding with a car going 60 Under a comparative negligence rule, if both parties were negligent, the injurer owes damages in less than the full amount. Comparative negligence is appealing from a fairness point of view – if both parties were responsible for the accident, let both bear the costs, in proportion to their negligence. But our original model suggested that any liability rule led to the same efficiency results So in order to defend the move to contributory negligence on economic grounds, we need to modify the original model in some way. Cooter and Ulen do this by considering evidentiary uncertainty – the idea that there is uncertainty in how the court will interpret evidence, and therefore whether the court will find a party negligent.

Comparative Negligence and Evidentiary Uncertainty Given a legal standard for negligence, xn… …and an actual level of precaution taken, x… still uncertainty in whether the court will find negligence Evidentiary uncertainty, like random errors in setting xn, leads to over-precaution… …but comparative negligence partly mitigates this Cooter and Ulen do this by considering evidentiary uncertainty – the idea that there is uncertainty in how the court will interpret evidence, and therefore whether the court will find a party negligent. This is actually the third type of uncertainty we’ve seen relating to the legal standard of care. There were errors in setting the standard of care, x~ (both systematic and random) There were lapses, which led a party’s actual level of care to deviate from his intended level And now, even given a particular level of care x and standard x~, we are introducing uncertainty as to whether the court will interpret the evidence correctly and find the correct relationship between x and x~. Just like random errors in setting x~, uncertainty in finding liability will lead to overprecaution However, under a comparative negligence rule, the injurer might only be partly liable, instead of liable for the full cost of the accident… which mitigates this overprecaution

Comparative negligence and evidentiary uncertainty $ Comparative negligence, evidentiary uncertainty Simple negligence, evidentiary uncertainty Any negligence rule wx + p(x) A wx Under evidentiary uncertainty, (DRAW IT) This would be the case under any negligence rule, and would typically lead to over-precaution. Cooter and Ulen argue that the effect would be less under contributory negligence, because each party knows that even if they are found partly liable, the effect would not be 100% liability, but only partial liability. Thus, they argue that contributory negligence causes less overprecaution, and is therefore more efficient, when there is evidentiary uncertainty p(x) A x* x Comparative negligence mitigates effect of evidentiary uncertainty

Does it all matter?

Gary Schwartz, Reality in the Economic Analysis of Tort Law: Does Tort Law Really Deter? Reviews a wide range of empirical studies Finds: tort law does affect peoples’ behavior, in the direction the theory predicts… …but not as strongly as the model suggests Next question: does it all matter? That is, given all the time that we’ve just spent developing a formal economic model and examining its implications, it’s fair to step back a bit and ask the question: does the model work? Is there any evidence from the real world that a choice of liability rule affects peoples’ behavior in the way the model predicts? The usual assumption we make in economics is that if you make something more costly, people will do less of it. But when people get in their cars, do they really think about the amount they will have to pay in the event of an accident when deciding how fast and how far to drive? Do people really think about liability rules when deciding whether to get in a bar fight? This is exactly the question (not the bar fight question, the more general question) addressed in the paper by Gary Schwartz, “Reality in the Economic Analysis of Tort Law: Does Tort Law Really Deter?” He reviews a wide range of empirical studies in different areas of tort law, and comes to the following, not that startling conclusion: Tort law does affect peoples’ behavior, in the direction the economic model predicts, but not as much as a literal reading of the model would suggest

Gary Schwartz, Reality in the Economic Analysis of Tort Law: Does Tort Law Really Deter? Reviews a wide range of empirical studies Finds: tort law does affect peoples’ behavior, in the direction the theory predicts… …but not as strongly as the model suggests Most academic work either… took the model literally, or pointed out reasons why model was wrong and liability rules might not affect behavior at all Schwartz: the truth is somewhere in between He points out that most of the academic work prior to that point was either implicitly assuming that people behaved exactly as in the model; or pointing out various critiques of the model, and reasons why liability rules would not impact behavior at all but that the truth lay somewhere in between. One of the obvious ways in which the model is “wrong”: the model suggests that, under a negligence rule, injurers will always take the mandated level of care – that is, there will never be any negligence and yet there are lots of studies showing that negligence is rampant in auto accidents, in medical malpractice, and in other areas Nonetheless, studies in a variety of industries show that a greater degree of liability does lead to greater overall levels of precaution.

Gary Schwartz, Reality in the Economic Analysis of Tort Law: Does Tort Law Really Deter? “Yet between the economists’ strong claim that tort law systematically deters and the critics’ response that tort law rarely if ever deters lies an intermediate position: tort law, while not as effective as economic models suggest, may still be somewhat successful in achieving its stated deterrence goals. …The information [in various studies] suggests that the strong form of the deterrence argument is in error. Yet it provides support for that argument in its moderate form: sector-by-sector, tort law provides something significant by way of deterrence.”

Gary Schwartz, Reality in the Economic Analysis of Tort Law: Does Tort Law Really Deter? “Much of the modern economic analysis, then, is a worthwhile endeavor because it provides a stimulating intellectual exercise rather than because it reveals the impact of liability rules on the conduct of real-world actors. Consider, then, those public-policy analysts who, for whatever reason, do not secure enjoyment from a sophisticated economic proof – who care about the economic analysis only because it might show how tort liability rules can actually improve levels of safety in society. These analysts would be largely warranted in ignoring those portions of the law-and-economics literature that aim at fine-tuning.” Schwartz has a funny line toward the end of the paper He argues that since people do not respond as precisely to incentives as the model predicts, we shouldn’t spend so much time trying to “fine-tune” the law to achieve perfection: “Much of the modern economic analysis, then, is a worthwhile endeavor because it provides a stimulating intellectual exercise rather than because it reveals the impact of liability rules on the conduct of real-world actors. Consider, then, those public-policy analysts who, for whatever reason, do not secure enjoyment from a sophisticated economic proof – who care about the economic analysis only because it might show how tort liability rules can actually improve levels of safety in society. These analysts would be largely warranted in ignoring those portions of the law-and-economics literature that aim at fine-tuning.”

Gary Schwartz, Reality in the Economic Analysis of Tort Law: Does Tort Law Really Deter? Worker’s compensation rules in the U.S. Employer is liable – whether or not he was negligent – for economic costs of on-the-job accidents Victim still bears non-economic costs (pain and suffering, etc.) “…Worker’s compensation disavows its ability to manipulate liability rules so as to achieve in each case the precisely efficient result in terms of primary behavior; It accepts as adequate the notion that if the law imposes a significant portion of the accident loss on each set of parties, these parties will have reasonably strong incentives to take many of the steps that might be successful in reducing accident risks.” He also points out, since “fine-tuning” may not work, that simple rules start to make more sense He looks at the example of worker’s compensation in the United States Worker’s compensation holds the employer liable (whether or not he was negligent) for the economic costs of on-the-job accidents, while leaving the victim bearing all non-economic costs such as pain and suffering Schwartz argues: “Analyzed in incentive terms, this regime of “shared strict liability” takes for granted that there are many steps that employers can take, and also many things that employees can do, to reduce the work accident rate. Yet workers’ compensation disavows its ability to manipulate liability rules so as to achieve in each case the precisely efficient result in terms of primary behavior; it accepts as adequate the notion that if the law imposes a significant portion of the accident loss on each set of parties, these parties will have reasonably strong incentives to take many of the steps that might be successful in reducing accident risks.”

Relaxing the assumptions of our model Many of the objections Schwartz points out in his paper – reasons that people may not respond to liability laws in the way the “standard model” predicts – can be seen as violations of some of the assumptions that we’ve implicitly been making in the way we set up our model

Our model thus far has assumed… So far, our model has assumed: People are rational Injurers pay damages in full They don’t run out of money and go bankrupt There are no regulations in place other than the liability rule There is no insurance Litigation is costless We can think about what would happen when each of these assumptions is violated Many of the objections Schwartz points out in his paper – reasons that people may not respond to liability laws in the way the “standard model” predicts – can be seen as violations of what Cooter and Ulen refer to as the “core assumptions” of the model Specifically, the model as we’ve explained it so far assumes: Decision-makers are rational Injurers pay damages in full (for example, they can’t run out of money and go bankrupt) There are no regulations in place beyond the liability rule There is no insurance Litigation costs are zero We can relax each of these assumptions in turn, and see what effect this will have.

Assumption 1: Rationality Behavioral economics: people systematically misjudge value of probabilistic events Daniel Kahneman and Amos Tversky, “Prospect Theory: An Analysis of Decision under Risk” 45% chance of $6,000 versus 90% chance of $3,000 Most people (86%) chose the second 0.1% chance of $6,000 versus 0.2% chance of $3,000 Most people (73%) chose the first But under expected utility, either u(6000) > 2 u(3000), or it’s not So people don’t actually seem to be maximizing expected utility And the “errors” have to do with how people evaluate probabilities Assumption 1. Rationality Cooter and Ulen give two examples of ways in which the rationality assumption may be violated. The first is on the basis of a growing literature in behavioral economics that says that many people systematically misperceive the value of probabilistic events That is, a number of experiments have shown that when people evaluate probabilistic events, they make choices that are not compatible with the usual expected-utility framework. One classic example of this comes from a classic paper by Daniel Kahneman and Amos Tversky, called “Prospect Theory: An Analysis of Decision under Risk.” They found that given a choice between a 45% chance at $6,000 and a 90% chance at $3,000, most (86%) of their sample chose the latter; but given a choice between a 0.1% chance of $6,000 and a 0.2% chance of $3,000, most (73%) chose the former. Under the standard expected-utility setup, either u(6000) is twice as high as u(3000) or it’s not; here, people were clearly doing something other than maximizing expected utility; and it seems to do not with how they evaluate the value of money, but how they evaluate probability.

Assumption 1: Rationality People seem to overestimate chance of unlikely events with well-publicized, catastrophic events Freakonomics: people fixate on exotic, unlikely risks, rather than more commonplace ones that are more dangerous More recent work by the same authors – cited in the textbook – argues that people tend to overestimate the likelihood of events with well-publicized, catastrophic results, like accidents at nuclear power plants The resulting panic makes the few that occur stick in peoples’ minds, so they imagine them to be more frequent than they actually are. (There’s also a chapter in Freakonomics about how people fixate on the “wrong” risks That is, people freak out about very unlikely events, leading to lots of regulations about flame-retardant childrens’ pajamas But they ignore much more likely risks that seem more commonplace, such as swimming pool accidents.) All these examples build the case that maybe people don’t make perfectly rational expected-gain tradeoffs the way we expect them to Given that, we wouldn’t expect people to correctly trade off the expected incremental cost of probabilistic accidents, – p(x)’ A, against the certain cost of increased precaution, w.

Assumption 1: Rationality People seem to overestimate chance of unlikely events with well-publicized, catastrophic events Freakonomics: people fixate on exotic, unlikely risks, rather than more commonplace ones that are more dangerous How to apply this: accidents with power tools Could be designed safer, could be used more cautiously Suppose consumers underestimate risk of an accident Negligence with defense of contributory negligence: would lead to tools which are very safe when used correctly But would lead to too many accidents when consumers are irrational Strict liability would lead to products which were less likely to cause accidents even when used recklessly Cooter and Ulen consider the implications of this in a setting of bilateral precaution, accidents with power tools Power tools can be designed to be safer, and they can be used more cautiously. However, suppose consumers underestimate the likelihood of a power tool accident (People assume that any product on the market must be very safe, so they exercise no caution whatsoever.) A negligence rule with a defense of contributory negligence is common for product liability This would lead chainsaw companies to design chainsaws that are perfectly safe (or at least, efficiently safe) as long as they are not used negligently Under perfect rationality, this would lead consumers to take efficient care in using them, and all would be well But if irrational consumers underestimate chainsaw risk, this would lead to too many accidents On the other hand, a strict liability rule – along with the manufacturer knowing that its consumers will be negligent – will lead chainsaw manufacturers to design even safer chainsaws, which are less likely to cause accidents even when used recklessly In a world with irrational consumers, this is a good thing.

Assumption 1: Rationality Another type of irrationality: unintended lapses “Many accidents result from tangled feet, quavering hands, distracted eyes, slips of the tongue, wandering minds, weak wills, emotional outbursts, misjudged distances, or miscalculated consequences” The second type of irrationality Cooter and Ulen consider is unintended lapses, that is, accidental negligence Rather poetically, they point out that “many accidents results from tangled feet, quavering hands, distracted eyes, slips of the tongue, wandering minds, weak wills, emotional outbursts, misjudged distances, or miscalculated consequences” All of which they summarize as “lapses” The idea: people try to exercise due care, but once in a while, they fail. The example they give is from a world without cruise control The speed limit on a road is 70, and so driving faster than that constitutes negligence A driver intends to drive 65, but from time to time his mind wanders and he looks down to find himself driving 73 If one of these times, he’s in an accident, he’s liable. (On the other hand, a driver who sets out to drive 75, but mistakenly finds himself doing 67 when he hits someone, is not liable) Cooter and Ulen’s discussion here is weirdly moralistic They seem to take the position, both that speeding is somehow immoral, and that “not wanting to speed” is somehow more important than actually not speeding They point out that a driver who realizes he may occasionally lapse will rationally target a level of precaution higher than the legal standard, to lessen the frequency of these lapses taking him below the legal standard x~ (This is exactly the same effect as the overprecaution we expect as a result of random uncertainty about the exact legal standard.) As they point out, however, a liability rule that required intentional negligence, rather than accidental negligence, would be almost impossible to enforce Proving intent is even harder than proving negligence, which was already harder than proving harm and causation Such a rule would likely lead to most injurers avoiding liability altogether, leading to no incentives for precaution They give the rather creepy notion that GPS in cars will eventually allow us to distinguish the habitual speeder from the “accidental” speeder, and then move on.

Assumption 2: Injurers pay damages in full Strict liability: injurer internalizes expected harm done, leading to efficient precaution But what if… Harm done is $1,000,000 Injurer only has $100,000 So injurer can only pay $100,000 But if he anticipates this, he knows D << A… …so he doesn’t internalize full cost of harm… …so he takes inefficiently little precaution Injurer whose liability is limited by bankruptcy is called judgment-proof We’ve said all along that strict liability causes an injurer to internalize the expected harm done by accidents, leading to efficient precaution That is: if ex post, society can charge me money equal to the harm I caused… …then ex ante, I consider this part of my private cost, and make efficient decisions But we also saw that if D < A – if the damages I owe are less than the harm I caused – I take less than efficient precaution So what happens if I’m broke? Or, consider a situation in which a firm’s liability is more than its net worth, that is, more than the total value of the company The firm has no way to come up with the damages owed; so it declares bankruptcy Thus, bankruptcy places a limit on the damages that can be paid But if the damages that will actually be paid are less than the actual harm, then the firm is not internalizing the full cost of accidents As a result, the firm will take inefficiently little precaution. The book considers the example of a hazardous waste disposal company If the company intends to stay in business forever, it will be very careful in transporting hazardous waste, in order to avoid accidents/liability On the other hand, it might take a different strategy: dump recklessly earn short-term profits pay them out to shareholders remain undercapitalized and expect to go bankrupt the first time an accident happens An injurer whose liability is limited by bankruptcy is referred to as being judgment-proof That is, they are immune to judgments beyond a certain level If I have $100,000 in the bank and I cause an accident causing $1,000,000 in harm, I expect to only pay $100,000 So my incentive to take precautions is much lower

Example of judgment-proofness (from old final exam) Owner of an oil tanker Any accident would be an environmental catastrophe, doing $50,000,000 of harm Upgraded navigation system would cost $225,000, and reduce likelihood of an accident from 1/100 to 1/500 Precaution reduces expected harm from $500,000 to $100,000, costs $225,000, so efficient to take precaution If company would be forced to pay $50,000,000 after an accident, then under strict liability, would choose to buy new nav system Suppose the business is only worth $5,000,000 If there’s an accident, pay the $5,000,000 and go out of business Now nav system reduces expected damages from $50,000 to $10,000 – not worth the cost So judgment-proof business would take too little precaution There is no perfect solution to the distortions that this causes But there are some ways to reduce them One of which is regulation, which is the third extension we consider

Assumption 3: No regulation What stops me from speeding? If I cause an accident, I’ll have to pay for it Even if I don’t cause an accident, I might get a speeding ticket Similarly, fire regulations might require a store to have a working fire extinguisher Regulations supply additional incentive to take precaution The next extension is that some settings are governed by both a liability rule and safety regulations For example, if I speed and cause a car accident, I may be liable But if I get caught speeding, I’ll get a ticket, even if I didn’t cause an accident Similarly, fire regulations may require a store to have a working fire extinguisher, and fines may be issued to stores that fail safety inspections But on top of the regulations, if a fire in the store injured a customer, the store would still be liable (When there is both liability and safety regulation, courts could adopt the safety standards as the required standard of care, or could still impose a separate standard. The textbook gives examples of reasons a court might worry industry regulators might set standards either too low or too high.)

Continuing the example of judgment-proofness from before… We saw, if business is only worth $5,000,000, liability does not create enough incentive to upgrade nav system Now suppose government passes regulation requiring modern navigation systems on all oil tankers If business doesn’t upgrade, 1 in 5 chance of being caught by safety inspector and having to pay a $1,000,000 fine Now, combining liability with regulation… Upgrade: cost of new nav system is $225,000, expected damages are $10,000  private cost is $235,000 Don’t upgrade: expected damages are $50,000, expected government fine is $200,000  private cost is $250,000 Liability + regulation gives enough incentive to take precaution, even though either one alone would not be enough

Assumption 3: No regulation When liability > injurer’s wealth, liability does not create enough incentive for efficient precaution Regulations which require efficient precaution solve the problem Regulations also work better than liability when accidents impose small harm on large group of people As we just saw, when liability exceeds an injurer’s total wealth, the injurer goes bankrupt, but cannot be held liable for the full amount of the harm In settings where damages would bankrupt a firm, expected damage payments would be lower than p(x)A, since damages would be limited to an amount less than A. This would lead to insufficient precaution under a strict liability rule However, regulations which hold a firm to the efficient level of care avoid this problem, since large fines could be assessed to firms in violation of safety standards before an accident occurs Thus, in industries where severe accidents are likely to bankrupt firms, safety regulation may work better than liability in encouraging precaution. Regulation may also be better than liability when accidents impose only a small harm on a large group of people: since going to trial is costly, it may not be worth it for victims suffering only a small harm, and firms might escape liability because nobody finds it worthwhile to sue. (Class action lawsuits also get around this problem – we’ll get to that later.) In these cases, liability alone might also lead to insufficient precaution, while regulation can enforce the efficient level of care.

Assumption 4: No insurance We assumed injurer or victim actually bears cost of accident When injurer or victim has insurance, they no longer have incentive to take precaution But, insurance tends not to be complete insurance Going back to the fundamental assumptions we’ve been making in tort law… If I drive more carefully, I cause fewer accidents If I face greater liability when I cause accidents, I choose to drive more carefully On the other hand, if I have insurance that covers me when I cause accidents, then the liability rule chosen may not affect me, only my insurance company The third assumption we made in the original model was that either the victim or the injurer bears the cost of the accident – that is, neither side has insurance. In reality, the victim might buy insurance for harm caused by accidents, and the injurer might buy insurance to cover his liability. However, insurance tends not to be complete The victim’s car insurance may include a deductible (the insurer doesn’t pay the first $500 of damage), coinsurance or copayment (the insurer pays some fraction of damage rather than the full amount), and coverage may only be for tangible losses, not all damage. The injurer’s liability insurance may also be incomplete – in addition to deductibles or coinsurance, an accident may cause his future premiums to go up, so the injurer is not completely insulated from the cost of the accident.

Assumption 4: No insurance Insurance reduces incentive to take precaution Moral hazard Insurance companies have ways to reduce moral hazard Deductibles, copayments Increasing premiums after accidents Insurers may impose safety standards that policyholders must meet Insurance reduces the incentives to take precaution. In insurance, this is referred to as moral hazard. (If I insure my car against theft, I don’t worry as much about where I park it.) Insurance companies have lots of ways to reduce moral hazard, mostly ones we’ve already mentioned – deductibles, coinsurance, and making a customer’s premiums depend on his past driving performance. Nonetheless, insurance clearly leads to lower levels of precaution. To deal with this, liability insurers may impose safety standards that policyholders must meet. For example, a fire insurance company may require its customers to maintain fire extinguishers. Or a car insurance policy might not cover you if you’re driving drunk Like before with safety regulators, insurance companies can impose ex ante standards – or, to put it in our terms, they can make even insured customers face liability if they are negligent The book goes on for a while about insurance – trying to use insurance to argue whether strict liability or no liability is better. They point out that in a strict liability world with insurance, a manufacturer who makes a lot of defective products might find their insurance rates going up over time, giving an incentive to reduce defects. In addition, if a manufacturer buys liability insurance, the insurance company would have an incentive to monitor the manufacturer and make sure they’re making safe products. (They also mention two reasons the insurance industry is thought to be “unstable” – the fact that correlated losses may exhaust reserves, and the problem of adverse selection.)

Assumption 5: Litigation costs nothing If litigation is costly, this affects incentives in both directions If lawsuits are costly for victims, they may bring fewer suits Some accidents “unpunished”  less incentive for precaution But if being sued is costly for injurers, they internalize more than the cost of the accident So more incentive for precaution A clever (unrealistic) way to reduce litigation costs At the start of every lawsuit, flip a coin Heads: lawsuit proceeds, damages are doubled Tails: lawsuit immediately dismissed Expected damages are the same  same incentives for precaution But half as many lawsuits to deal with! The final assumption Cooter and Ulen relax is the assumption that litigation costs nothing They point out that if litigation is costly on both sides, it skews the incentives in both directions If suing for damages is costly for victims, we would expect them to bring fewer suits; this means more accidents would go “unpunished”, providing less incentive for precaution. On the other hand, if being sued for damages is costly for injurers, this adds an additional cost to the damages they expect to pay; this increases the incentives to avoid trial in the first place by preventing the accident, leading to greater precaution. They also give a funny example of how litigation costs could be reduced, if all we’re concerned about is maintain the right incentives. Consider a world where any time someone sues for damages, a coin is flipped. With probability ½, the case is dismissed immediately, before the trial begins. With probability ½, the case goes to trial, and whatever damages are deemed fair, they are doubled. Beforehand, the injurer faces the exact same level of expected damages, and so he behaves exactly the same. After the fact, however, we’ve reduced the number of costly trials by 50%. Obviously, this isn’t likely to happen In fact, a Virginia judge was removed from the bench last year for, among other things, deciding which parent would have visitation rights for Christmas by coin flip The judge apparently had other problems too, though. When we get to criminal law, we’ll look at the tradeoff between probability of enforcement and severity of punishment, and the effect this has on criminal behavior.

Perfect Compensation

Perfect compensation But in some cases, hard to determine level Perfect compensatory damages (D = A) Returns victim to original level of well-being (Works like insurance) And sets correct incentive for injurers But in some cases, hard to determine level Might be no price at which you’d be willing to give up a leg Certainly no price at which a parent would be indifferent toward losing a child One thing that we’ve been taking for granted is that damages can be set to exactly match the level of harm. That is, we’ve been assuming the possibility of perfect compensatory damages Meaning, damages that make the victim indifferent between having been in the accident and received damages, and never having been injured in the first place Perfect compensatory damages accomplish two things: First, it returns the victim to their original level of well-being – not so important from an efficiency point of view, but appealing in terms of fairness. (In addition, this means that liability functions like insurance – if we imagine that people are risk-averse, this is probably a good thing.) Second, if the “price” of injuring someone matches the actual harm done, the injurer exactly internalizes the externality he’s causing by his actions, leading to correct incentives In some instances, compensatory damages like this are not too hard to calculate. If I cause an accident that destroys your car, we can figure out the market price of cars similar to yours. Even if your car is a rare antique, there’s probably some price at which you would have been willing to sell it; figuring out that price might be tricky in practice, but isn’t a big deal conceptually. However, there are some items for which there is nothing approaching a market substitute, and no amount of damages is likely to make someone indifferent. There might be no price at which you would be willing to give up an arm or a leg There is certainly no price at which most parents would be indifferent toward losing a child. Calculating damages in these cases is a hard problem, and there is no clear guideline for what they should be

Perfect compensation And from California: Recommended jury instructions, Massachusetts: “Recovery for wrongful death represents damages to the survivors for the loss of value of decedent’s life. There is no special formula under the law to assess the plaintiff’s damages… It is your obligation to assess what is fair, adequate, and just. You must use your wisdom and judgment and your sense of basic justice to translate into dollars and cents the amount which will fully, fairly, and reasonably compensate the next of kin for the death of the decedent. You must be guided by your common sense and your conscience on the evidence of the case…” And from California: “…You should award reasonable compensation for the loss of love, companionship, comfort, affection, society, solace or moral support.” Cooter and Ulen cite recommended jury instructions from a couple of states, to point out that juries are not given much of a theoretical framework for calculating the value of a life

One other odd feature of compensatory damages… Most people would rather be horribly injured than killed Which means killing someone does more damage than injuring someone But compensatory damages tend to be lower for a fatal accident than an accident which crippled someone When someone is badly injured, may require huge amount of money to compensate them In wrongful-death case, damages compensate victim’s loved ones, but no attempt to compensate victim So these damages tend to be smaller The book also points out an odd characteristic of compensatory damages Most people would rather be horribly injured than killed, so killing someone does more damage than injuring someone However, compensatory damages tend to be lower for a fatal accident than for an accident which cripples someone This is because when someone is badly injured in an accident, it may require a huge amount of money to compensate them: ongoing medical treatment, pain and suffering, and the change in quality-of-life over the remainder of their life When someone is killed, they are no longer able to receive compensation, so no attempt is made to compensate them Damages in a wrongful-death case are meant to compensate their loved ones for their loss – lost income the victim’s family would have received over the rest of his working life, and lost companionship Because no attempt is made to compensate the dead victim, these damages tend to be smaller.

What’s a life worth?

Estimated cost per life saved What’s a life worth? Assessing damages in a wrongful death lawsuit requires some notion of what a life is worth Safety regulators also need some notion of what a life is worth Kip Viscusi, The Value of Risks to Life and Health Regulators need to decide “where to draw the line” Regulation Estimated cost per life saved Courts are not the only entities who sometimes need to relate some amount of money to the value of a life: so do regulators Safety regulators can always save incremental lives by imposing tougher and tougher regulations, which will then be more and more costly to comply with. Knowing when to stop requires a cost-benefit analysis, which in turn requires some notion of how much saving a life is worth. The paper by Kip Viscusi, “The Value of Risks to Life and Health” Viscusi points out that the cost to save an incremental life varies wildly across different types of safety regulation: Airplane cabin fire protection costs $200,000 per life saved; automobile side door protection standards save lives at $1.3 million each; Occupational Safety and Health Administration (OSHA) asbestos regulations save lives at $89.3 million each; Environmental Protection Agency (EPA) asbestos regulations save lives at $104.2 million each; and a proposed OSHA formaldehyde standard cost $72 billion per life saved. Airplane cabin fire protection $ 200,000 Car side door protection standards $ 1,300,000 OSHA asbestos regulations $ 89,300,000 EPA asbestos regulations $ 104,200,000 Proposed OSHA formaldehyde standard $72,000,000,000

Kip Viscusi, The Value of Risks to Life and Health Let w be starting wealth, p probability of death There might be some amount of money M such that Breaks down when p = 1 not because can’t equate death with compensation, but because second term vanishes If we can find M, we can solve for u(death)! Ask a bunch of people how much money they would need to take a 1/1000 chance of death? Do a lab experiment where you expose people to a risk of death? Better idea: impute how much compensation people require from the real-life choices they make p u(death) + (1 – p) u(w+M) = u(w) Most people won’t have a good answer if you ask them how much money they would demand to allow you to kill them That is, there’s no amount of money you could give someone to make them indifferent between living and dying Conceptually, though, part of the problem here is that, once you’re dead, you get no benefit from having the money It’s entirely possible that there is some amount of money you could give someone to make them willing to take a probabilistic risk of dying That is, for a given risk of dying p, there could be some amount of money that, enjoyed the rest of the time (when you don’t die), makes that risk of death acceptable if w is your starting wealth, D is death, and p is the probability, there could be some amount of money M such that p u(D) + (1-p) u(w + M) = u(w) When p goes to 1, this breaks down not because you can’t equate death with compensation, but because the second term vanishes So in theory, if we wanted to know what a life was worth, we could poll a bunch of people and ask how much money they’d demand to take a 1/100 risk of death, or a 1/1000 risk of death, or even a 1/10 risk of death, and see what they said However, there’s no way to test whether what they’re saying is right That is, unlike some economic experiments, where we can put a bunch of students in a lab and have them play for actual money, there’s no way to carry out an experiment where we actually intend to deliberately expose people to a risk of death. However, there is a way around this: we can try to impute the compensation people demand for risk from the choices they actually make.

Kip Viscusi, The Value of Risks to Life and Health Lots of day-to-day choices increase or decrease our risk of death Choose between Volvo and sports car with fiberglass body Take a job washing skyscraper windows, or office job that pays less Buy smoke detectors and fire extinguishers, or don’t “Hand Rule Damages” Hand Rule: precaution is cost-justified if cost of precaution < reduction in accidents X cost of accident Suppose side-curtain airbags reduce risk of fatal accident by 1/1000 If someone pays $1,000 extra for a car with side-curtain airbags, it must mean that $1,000 < 1/1000 * value of their life or, implicitly, they value their life more than $1,000,000 There are lots of things we do in day-to-day life that increase or decrease our risk of death we choose between a sports car with a fiberglass body and a Volvo we take a job washing skyscraper windows, or a job answering phones that pays less we buy smoke detectors and fire extinguishers, or we don’t If we observe the choices people actually make when facing these tradeoffs, we can try to impute the value people place on their own life. The textbook points out that this can be done by reinterpreting the Hand rule for efficient precaution Recall that the Hand rule said that precaution is cost-justified if cost of precaution < reduction in likelihood of accident X cost of accident The same rule applies for individuals: we expect people to take precautions to reduce risks to themselves when they are cost-justified Suppose that over the lifetime of a car, side-curtain airbags reduce the risk of a fatal accident by 1/1000 And suppose buying a car with side-curtain airbags costs an extra $1000 When we see someone paying $1,000 more for a car with side-curtain airbags, it suggests that they find the precaution cost-justified meaning that $1000 < 1/1000 * value of their life or they value their life more highly than $1,000,000. The book refers to this as “Hand rule damages” – using the Hand rule to figure out how highly people value their lives, and applying this to calculations of damages. And in fact, this is exactly what the Viscusi paper does

Kip Viscusi, The Value of Risks to Life and Health Viscusi surveys lots of existing studies which impute value of life from peoples’ decisions Many use wage differentials How much higher are wages for risky jobs compared to safe jobs? Others look at… Decisions to speed, wear seatbelts, buy smoke detectors, smoke cigarettes Decision to live in very polluted areas (comparing property values) Prices of newer, safer cars versus older, more dangerous ones Some used surveys to ask how people would make tradeoffs between money and safety Each paper reaches some estimate for implicit value people attach to their lives The Viscusi paper (“The Value of Risks to Life and Health”) is a survey of a large number of existing papers, which try to impute the value of life from decisions people make that affect their risk of death Many of the studies use wage differentials: how much higher wages do people demand to work in risky jobs rather than safe ones? Of course, there are several difficulties with this approach: working in a coal mine may be riskier than answering phones; but it may also be less pleasant for other reasons jobs with a higher risk of death probably also carry a higher risk of nonfatal injuries, so the wage differential will account for both of these, and it’s hard to isolate just the death part if we accept that people rationally trade off money against risk, the people who choose to take risky jobs probably have lower-than-average valuations for dying as we mentioned last week, people may systematically misestimate the effects of low-probability events, so wages demanded will be based on biased estimates of the actual riskiness of the profession Nonetheless, there are a number of papers that have tried to overcome these challenges, and use wage data to estimate how highly workers are revealed to value their lives. There are also several papers that look at decisions other than jobs, and impute the value of life based on the decisions people make: decisions to speed (trading off risk of death versus value of time) decision to use seatbelts (trading off some disutility, or discomfort, of wearing them) decision to buy smoke detectors, decision to smoke cigarettes decision to live in particularly polluted areas (by comparing property values) prices of new, safer cars versus older, more dangerous ones (Also several studies where people were asked in surveys to make hypothetical tradeoffs between money and safety.) Each paper comes up with some estimate for the implicit value people attach to their lives, probabilistically.

What does Viscusi find?

What does Viscusi find? 24 studies based on wage differentials Implicit value of life

What does Viscusi find? 7 studies using other risk-money tradeoffs Nature of Risk, Year Component of the Monetary Tradeoff Implicit Value of life ($ millions) Highway speed-related accident risk, 1973 Value of driver time based on wage rates 0.07 Automobile death risks, 1972 Estimated disutility of seat belts 1.2 Fire fatality risks without smoke detectors, 1974-1979 Purchase price of smoke detectors 0.6 Mortality effects of air pollution, 1978 Property values in Allegheny Co., PA 0.8 Cigarette smoking risks, 1980 Estimated monetary equivalent of effect of risk info 0.7 Fire fatality risks without smoke detectors, 1968-1985 Purchase price of smoke detector 2.0 Automobile accident risks, 1986 Prices of new automobiles 4.0

What does Viscusi find? 6 studies based on surveys Nature of Risk Survey Methodology Implicit Value of Life ($ millions) Improved ambulance service, post-heart attack lives Willingness to pay question, door-to-door small (36) Boston sample 0.1 Airline safety and locational life expectancy risks Mail survey willingness to accept increased risk, small (30) U.K. sample, 1975 15.6 Job fatality risk Willingness to pay, willingness to accept change in job risk in mail survey, 1984 3.4 (pay), 8.8 (accept) Motor vehicle accidents Willingness to pay for risk reduction, U.K. survey, 1982 3.8 Automobile accident risks Interactive computer program with pairwise auto risk-living cost tradeoffs until indifference achieved, 1987 2.7 (median) 9.7 (mean) Traffic safety Series of contingent valuation questions, New Zealand survey, 1989-1990 1.2

What does Viscusi find? Wide range of results Most suggest value of life between $1,000,000 and $10,000,000 Many clustered between $3,000,000 and $7,000,000 Even with wide range, he argues this is very useful: “In practice, value-of-life debates seldom focus on whether the appropriate value of life should be $3 or $4 million… However, the estimates do provide guidance as to whether risk reduction efforts that cost $50,000 per life saved or $50 million per life saved are warranted.” “The threshold for the Office of Management and Budget to be successful in rejecting proposed risk regulations has been in excess of $100 million.” C&U: NHTSA uses $2.5 million for value of traffic fatality Current: EPA $9.1 MM, FDA $7.9 MM, Transpo Dept $6 MM So, what does Viscusi find? He finds is a wide range of results, but with nearly all of them ranging from a little below $1,000,000 to a little above $10,000,000. He claims that “most of the reasonable estimates” are clustered between $3 and $7 million, although this may be based on defining “reasonable” as estimates in the middle of the range. He points out, though, that even with this wide range, the information is useful: “In practice, value-of-life debates seldom focus on whether the appropriate value of life should be $3 million or $4 million… However, the estimates do provide guidance as to whether risk reduction efforts that cost $50,000 per life saved or $50 million per life saved are warranted.” He also notes: “The threshold for the Office of Management and Budget to be successful in rejecting proposed risk regulations has been in excess of $100 million.” (Cooter and Ulen add that the National Highway Traffic Safety Administration often values a traffic fatality at $2.5 million in cost-benefit analyses. Since the textbook was written, the estimates used by various agencies have gone up. A recent (Feb 16 2011) New York Times article showed current estimates of $9.1 million in use by the Environmental Protection Agency, $7.9 million by the Food and Drug Administration, and $6 million by the Transportation Department (which had been using $3.5 million at one point during the Bush years The article is at http://www.nytimes.com/2011/02/17/business/economy/17regulation.html?pagewanted=2&_r=1&hp

More twists on liability

Vicarious Liability Vicarious liability is when one person is held liable for harm caused by another Parents may be liable for harm caused by their child Employer may be liable for harm caused by employee Respondeat superior – “let the master answer” Employer is liable for unintentional torts of employee if employee was acting within the scope of his employment These are instances when someone is held responsible for harm caused by someone else One example of this is parents being held liable for harm caused by their child The most common version, however, is an employer being held liable for harm caused by an employee The legal doctrine is referred to as respondeat superior, “let the master answer” Roughly, an employer will be held liable for unintentional torts of his employees if the employee was acting within the scope of his employment For example, I hire someone to deliver packages in a company truck If he speeds on his delivery route and causes an accident; I am held liable But if I hire someone to deliver packages and he goes quail hunting during his lunch break and shoots another hunter, I am not liable He was not acting within the scope of his employment when he caused the accident (It might have been before your time, but in the early 90’s, Domino’s had a thirty-minutes-or-less guarantee or your pizza was free. A few accidents caused by speeding delivery drivers, a few lawsuits finding Domino’s liable, end of the guarantee.)

Vicarious Liability Gives employers incentive to... be more careful who they hire be more careful what they assign employees to do supervise employees more carefully Employers may be better able to make these decisions than employees… …and employees may be judgment-proof A rule of respondeat superior gives employers incentives to take greater care in who they hire, and what they assign them to do If employers are better positioned to make these decisions than employees, this may result in greater efficiency Also, employees might have less money, and therefore be judgment-proof Respondeat superior gives the employer an incentive to keep an eye on his employees and make sure they are behaving responsibly

Vicarious Liability Vicarious liability can be implemented through… Strict liability rule: employer liable for any harm caused by employee (as long as employee was acting within scope of employment) Negligence rule: employer is only liable if he was negligent in supervising employee Which is better? It depends. If proving negligent supervision is too hard, strict vicarious liability might work better But an example favoring negligent vicarious liability… Vicarious liability can be implemented through either a strict liability or a negligence rule. Under strict vicarious liability, an employer would be liable for any harms caused by their employees. Under negligent vicarious liability, the employer is only liable if he was negligent in supervising the employee Which rule is better depends on the situation. Proving negligence is always harder than just proving harm and causation If proving negligent supervision is too hard, then a rule of vicarious liability is worthless, since it will never be successfully applied. The book gives the example of a negligent nurse in a hospital Proving that the hospital was negligent in supervising the nurse adequately might be nearly impossible So negligent vicarious liability would lead to no incentives for the hospital to supervise its staff properly Strict vicarious liability would lead the hospital to reduce accidents. For an example favoring a negligence rule, the book gives the following example: “A sailor on a tanker might negligently discharge oil onto a public beach at night. Informing the authorities quickly about the accident will reduce the resulting harm and the cost of the cleanup. The employer might be the only person besides the sailor who knows that the harm occurred or who can prove that pollution came from its ship. Strict vicarious liability gives the employer an incentive to remain silent in the hope of escaping detection. In contrast, a rule of negligent vicarious liability gives the employer an incentive to reveal the harm to the authorities immediately in order to show that it carefully monitors its sailors.”

Joint and Several Liability Suppose you were harmed by accident caused by two injurers Joint liability: you can sue them both together Several liability: you can sue each one separately Several liability with contribution: each is only liable for his share of damage Joint and several liability: you can sue either one for the full amount of the harm Joint and several liability with contribution: the one you sued could then sue his friend to get back half his money Suppose that you are injured in an accident caused by two injurers For example, a friend and I are drag-racing our cars, and one of us hits you Suppose the total harm done is $1,000 We are jointly liable if you can sue both of us at once, naming us as co-defendants and recovering $1,000 from us together We are severally liable if you can sue each of us separately Several liability with contribution is when each of us is only liable for a share of the damage, or your total recoveries are limited to the total harm done Several liability without contribution would be if you could sue us each separately for the full $1000, but this is generally not allowed We are jointly and severally liable if you can sue either one of us for the full amount of damages, $1,000 With contribution would mean that if you sued me and won $1,000, I could then sue my friend to pay me back his share of it.

Joint and Several Liability Joint and several liability holds under common law when… Defendants acted together to cause the harm, or… Harm was indivisible (impossible to tell who was at fault) Good for the victim, because… No need to prove exactly who caused harm Greater chance of collecting full level of damages Instead of suing person most responsible, could sue person most likely to be able to pay Joint and several liability holds under the common law in two situations: The defendants acted together to cause the harm, or The harm was indivisible, that is, it’s impossible to tell who was actually at fault. (For example, the two hunters simultaneously shoot the third guy.) There are several advantages to joint and several liability from the victim’s point of view. First, the victim does not need to prove exactly who caused the harm. The book gives the example of an anesthetized patient being injured during an operation Under joint and several liability, he or she could sue anyone in the operating room at the time Which is good, since the patient would have no idea what had happened while he was unconscious Joint and several liability also increases the victim’s chances of collecting the full level of damages This is because instead of going after the person most directly responsible for the harm, he can go after the person most likely to be able to pay, that is, the one with the deep pockets. For example, suppose an uninsured drunk driver blows a stop sign and hits you. You claim that the driver and the state highway department are jointly responsible the driver for being drunk and hitting you the highway department because the stop sign was not placed in the right location or did not use proper reflective paint. Under joint and several liability, you need only convince the court that the state was 1% responsible, then you could still recover 100% of damages from the state leaving the state to try to recover the other 99% from the driver (Cooter and Ulen seem to push this as a good thing; others argue this as a negative. It’s clearly good for the victim, though.)