Econ 522 Economics of Law Dan Quint Spring 2013 Lecture 21

1 What’s a life worth?

2  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” What’s a life worth? $72,000,000,000Proposed OSHA formaldehyde standard $ 104,200,000EPA asbestos regulations $ 89,300,000OSHA asbestos regulations $ 1,300,000Car side door protection standards $ 200,000Airplane cabin fire protection Estimated cost per life savedRegulation

3  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 Kip Viscusi, The Value of Risks to Life and Health p u(death) + (1 – p) u(w+M)= u(w)

4  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 Kip Viscusi, The Value of Risks to Life and Health

5  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 Kip Viscusi, The Value of Risks to Life and Health

6 What does Viscusi find?

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

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

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

10  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 What does Viscusi find?

11 More twists on liability

12  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 torts of employee if employee was acting within the scope of his employment Vicarious Liability

13  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 Vicarious Liability

14  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

15  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 Joint and Several Liability

16  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

17 Punitive damages

18  Damage awards vary greatly across countries, even across individual cases  We saw last week:  As long as damages are correct on average, random inconsistency doesn’t affect incentives (under either strict liability or negligence)  But, if appropriate level of damages isn’t well-established, more incentive to spend more fighting Inconsistency of damages

19  Example: each side can hire cheap lawyer or expensive lawyer  Cheap lawyer costs $10, expensive lawyer costs $45  If two lawyers are equally good, expected judgment is $100  If one is better, expected judgment is doubled or halved One problem with inconsistent damages: more incentive to fight hard 90, , , , -145 CheapExpensive Cheap Lawyer Expensive Lawyer Defendant Plaintiff

20  What we’ve discussed so far: compensatory damages  Meant to “make victim whole”/compensate for actual damage done  In addition, courts sometimes award punitive damages  Additional damages meant to punish injurer  Create stronger incentive to avoid initial harm  Punitive damages generally not awarded for innocent mistakes, but may be used when injurer’s behavior was “malicious, oppressive, gross, willful and wanton, or fraudulent” Punitive damages

21  Calculation of punitive damages even less well-defined than compensatory damages  Level of punitive damages supposed to bear “reasonable relationship” to level of compensatory damages  Not clear exactly what this means  U.S. Supreme Court: punitive damages more than ten times compensatory damages will attract “close scrutiny,” but not explicitly ruled out Punitive damages

22  Stella Liebeck was badly burned when she spilled a cup of McDonalds coffee in her lap  Awarded $160,000 in compensatory damages, plus $2.9 million in punitive damages  Case became “poster child” for excessive damages, but… Example of punitive damages: Liebeck v McDonalds (1994) (“the coffee cup case”)

23  Stella Liebeck dumped coffee in her lap while adding cream/sugar  Third degree burns, 8 days in hospital, skin grafts, 2 years treatment  Initially sued for $20,000, mostly for medical costs  McDonalds offered to settle for $800  McDonalds serves coffee at degrees  At 180 degrees, coffee can cause a third-degree burn requiring skin grafts in seconds  Lower temperature would increase length of exposure necessary  McDonalds had received 700 prior complaints of burns, and had settled with some of the victims  Quality control manager testified that 700 complaints, given how many cups of coffee McDonalds serves, was not sufficient for McDonalds to reexamine practices Liebeck v McDonalds (1994)

24  Rule in place was comparative negligence  Jury found both parties negligent, McDonalds 80% responsible  Calculated compensatory damages of $200,000  times 80% gives $160,000  Added $2.9 million in punitive damages  Judge reduced punitive damages to 3X compensatory, making total damages $640,000  During appeal, parties settled out of court for some smaller amount  Jury seemed to be using punitive damages to punish McDonalds for being arrogant and uncaring Liebeck v McDonalds (1994)

25  We’ve said all along: with perfect compensation, incentives for injurer are set correctly. So why punitive damages?  Example…  Suppose manufacturer can eliminate 10 accidents a year, each causing $1,000 in damages, for $9,000  Clearly efficient  If every accident victim would sue and win, company has incentive to take this precaution  But if some won’t, then not enough incentive  Suppose only half the victims will bring successful lawsuits  Compensatory damages would be $5,000; company is better off paying that then taking efficient precaution  One way to fix this: award higher damages in the cases that are brought What is the economic purpose of punitive damages?

26  Punitive damages should be related to compensatory damages, but higher the more likely injurer is to “get away with it”  If 50% of accidents will lead to successful lawsuits, total damages should be 2 X harm  Which requires punitive damages = compensatory damages  If 10% of accidents lead to awards, damages should be 10 X harm  So punitive damages should be 9 X compensatory damages  Seems most appropriate when injurer’s actions were deliberately fraudulent, since may have been based on cost- benefit analysis of chance of being caught This suggests…

27 Some empirical observations about tort system in the U.S. (might not get to) Skip

28  In 1990s, tort cases passed contract cases as most common form of lawsuit  Most handled at state level: in 1994, 41,000 tort cases resolved in federal courts, 378,000 in state courts in largest 75 counties  Most involve a single plaintiff (many contract cases involve multiple plaintiffs)  Among tort cases in 75 largest U.S. counties…  60% were auto accidents  17% were “premises liability” (slip-and-fall in restaurants, businesses, government offices, etc.)  5% were medical malpractice  3% were product liability U.S. tort system

29  Punitive damages historically very rare  , punitive damages in product liability cases were awarded 353 times  Average damage award was $625,000, reduced to $135,000 on appeal  Average punitive damages only slightly higher than compensatory  In many states, punitive damages limited, or require higher standard of evidence  Civil suits generally require “preponderance of evidence”  In many states, punitive damages require “clear and convincing” evidence U.S. tort system

30  Medical malpractice  New York study in 1980s: 1% of hospital admissions involved serious injury due to negligent care  Some estimates: 5% of total health care costs are “defensive medicine” – procedures undertaken purely to prevent lawsuits  Some states have considered caps on damages for medical malpractice U.S. tort system

31  Product liability  Recent survey of CEOs: “liability concerns caused 47% of those surveyed to drop one or more product lines, 25% to stop some research and development, and 39% to cancel plans for a new product.”  Liability standard for product-related accidents is “strict products liability”  Manufacturer is liable if product determined to be defective  Defect in design  Defect in manufacture  Defect in warning U.S. tort system

32  Most vaccines are weakened version of disease itself  Make you much less likely to acquire the disease  But often come with very small chance of contracting disease directly from vaccine  Salk polio vaccine wiped out polio, but caused 1 in 4,000,000 people vaccinated to contract polio  1974 case established maker had to warn about risk  Since then, some people were awarded damages after their children developed polio from vaccine  If liability can’t be avoided, built into cost of the drug  And discourages companies from developing vaccines Vaccines

33  Since health risks of asbestos understood, over 600,000 people have brought lawsuits against 6,000 defendants  DES (drug administered to pregnant women in 1950s)  Impossible to establish which firm produced dose given to a particular woman  California Supreme Court introduced “market share liability”  Class action lawsuit  Small, dispersed harms – no plaintiff might find it worthwhile to sue  Class action suits allow large lawsuits with lots of plaintiffs  Give more incentive for precaution against diffuse harms  But… Mass torts

34  Critics claim juries routinely hand out excessive awards and tort system is out of control…  …but actually it functions reasonably well  Outside of occasional, well-publicized outliers, damage awards are generally reasonable…  …and liability has led to decreases in accidents in many industries Cooter and Ulen’s overall assessment of U.S. tort system

35 My favorite problem from an old exam

36 “A tort plaintiff succeeded in collecting a large damage judgment. The defendant’s attorney, confident that the claimed injury was bogus, went over to the plaintiff after the trial and warned him that if he was ever seen out of his wheelchair he would be back in court on a charge of fraud. The plaintiff replied that to save the lawyer the cost of having him followed, he would be happy to describe his travel plans. He reached into his pocket and drew out an airline ticket – to Lourdes, the site of a Catholic shrine famous for miracles.” To wrap up tort law, a funny story from Friedman…