1. Econ 522 Economics of Law
Dan Quint
Fall 2010
Lecture 18

2. Logistics Midterm 2 will be returned Wednesday (hopefully)
HW 4 up soon
Next week:
Class will meet on Monday, not Wednesday (Thanksgiving)

3. So far… We’ve discussed a bunch of liability rules…
No liability
Strict liability
Various versions of a negligence rule
…and the effect of each rule on incentives for:
Injurer precaution
Victim precaution
Injurer activity level
Victim activity level

4. So far…
And we discussed effect of errors in calculating damages or standard for negligence
Strict liability rule
random errors in calculating damages have no effect
systematic errors effect injurer behavior
Negligence rule
small errors (random or systematic) in calculating damages have no effect on injurer precaution
errors in setting legal standard for negligence have strong effect on injurer precaution
uncertainty in legal standard leads to overprecaution

5. Up next…
What factors/complications has our simple model been leaving out?
How much money is your life worth?
But first…

6. Experiment

7. 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

8. Our model thus far has assumed…
So far, our model has assumed:
People are rational
There are no regulations in place other than the liability rule
There is no insurance
Injurers pay damages in full
They don’t run out of money and go bankrupt
Litigation costs are zero
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
There are no regulations in place beyond the liability rule
There is no insurance
Injurers pay damages in full (for example, they can’t run out of money and go bankrupt)
Litigation costs are zero
We can relax each of these assumptions in turn, and see what effect this will have.

9. 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.

10. 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.

11. 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.

12. 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.

13. 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

14. 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 could pay $50,000,000 in event of 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

15. 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
One solution: regulation
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

16. 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
When regulations exist, court could use these standards as legal standard of care for avoiding negligence
Or court might decide on a separate standard
The next extension they consider to the “standard” model is of settings which 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
Administrators who regulate only a single industry can acquire the detailed technical knowledge needed to set safety standards efficiently
While a court might have trouble acquiring this level of knowledge on a wide range of industries
In these settings, courts can adopt the legal standard set by safety regulators
With both standards set the same, “potential injurers will conform to that standard in order to avoid both ex ante fines and ex post liability.”
However, C&U also offer arguments why a court might fear industry regulators would set safety standards either too high or too low
If regulators are susceptible to political pressure from powerful firms, safety standards might be set too low to help them avoid liability
On the other hand, corrupt regulators might set standards too high, to ensure that bribing them would be cheaper for businesses than complying with the rules
Standards could also be set high to protect incumbent firms from new competition
Thus, courts may choose to deviate from regulated safety levels in setting the legal standard for care
When safety regulations and liability law impose different standards, firms will tend to follow the higher standard, to avoid both liability and fines.

17. 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.

18. 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

19. 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.

20. 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.)

21. 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.

22. More twists on liability

23. 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.)

24. 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

25. 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.”

26. 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.

27. 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.)

28. Back to Comparative Negligence
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.

29. 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

30. 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

31. Perfect Compensation

32. 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

33. 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

34. 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.

35. What’s a life worth?

36. 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
$ ,000
Car side door protection standards
$ ,300,000
OSHA asbestos regulations
$ ,300,000
EPA asbestos regulations
$ ,200,000
Proposed OSHA formaldehyde standard
$72,000,000,000

37. Kip Viscusi, The Value of Risks to Life and Health
Let w be starting wealth, D death, p probability
There might be some amount of money M such that
p u(D) + (1 – p) u(w + M) = u(w)
When p  1, this breaks down not because you can’t equate death with compensation, but because the second term vanishes
So how do we find M?
Ask a bunch of people how much money they would need to take a 1/1000 chance of death?
Can’t do a lab experiment where you actually expose people to a risk of death!
Clever trick: impute how much compensation people require from the real-life choices they make
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.

38. 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, 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

39. 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.

40. What does Viscusi find?

41. 24 studies based on wage differentials
Implicit value of life

42. 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,
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,
Purchase price of smoke detector
2.0
Automobile accident risks, 1986
Prices of new automobiles
4.0

43. 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,
1.2

44. Kip Viscusi, The Value of Risks to Life and Health
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: National Highway Traffic Safety Administration uses $2.5 million for value of traffic fatality in cost-benefit analysis
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.)

45. Punitive damages (this is where we stopped)

46. Inconsistency of damages
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
Cooter and Ulen also go on for a while about the inconsistency of damages – across countries, and even across similar accidents within a country.
As we saw last week, as long as damage awards are correct on average, random inconsistency won’t have much effect on precaution, under either a strict liability or a negligence rule.
However, aside from fairness, there are probably other costs associated with this inconsistency
Since the appropriate level of damages is not well-established, there is more incentive to spend more resources fighting for higher damages.

47. Punitive damages 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
What we’ve been talking about so far is compensatory damages – damages which are meant to “make the victim whole,” or to compensate for the damage actually done
In addition to this, courts will sometimes award punitive damages – additional damages intended solely to punish the injurer, in order to create a stronger incentive to avoid the harm initially
Most states have a rule for when punitive damages may be awarded
Punitive damages are generally not awarded for innocent mistakes; as a general rule, they are considered when the injurer’s behavior is
“malicious, oppressive, gross, willful and wanton, or fraudulent”

48. Punitive damages
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
How punitive damages are calculated – both how they should be, and how they actually are – is even murkier than compensatory damages, and therefore subject to even more uncertainty and inconsistency
They are supposed to bear a “reasonable relationship” to the level of compensatory damages, but “reasonable” has never been precisely quantified
The U.S. Supreme Court has held that punitive damages more than 10 times compensatory damages will attract “close scrutiny” as possibly being too high, but doesn’t explicitly rule them out.

49. Example of punitive damages: Liebeck v McDonalds (1994) (“the coffee cup case”)
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…
Many people have heard of the “coffee cup case”, Liebeck v McDonalds
a 1994 case where a woman who was burned when she spilled a cup of McDonalds coffee in her lap
she was awarded $160,000 in compensatory damages, and an additional $2.9 million in punitive damages.
This is often held up as the “poster child” for excessive damages, although the actual facts of the case give a different picture.

50. Liebeck v McDonalds (1994)
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
Stella Liebeck bought coffee at a McDonalds drive-through, then parked to add cream and sugar
When she took the lid off, she dumped the cup on her lap; the coffee soaked into her sweatpants and was held against her skin for 90 seconds, giving her third degree burns
She was in the hospital for 8 days, and required skin grafts; after that, she had two years of treatment.
She initially sued McDonalds for $20,000, mostly to cover $11,000 in medical costs
They offered $800
She hired a lawyer, and sued for more
McDonalds refused a number of offers to settle.
At trial, it was revealed that McDonalds serves coffee at degrees.
Liebeck’s lawyers presented evidence that at 180 degrees, coffee can cause a third-degree burn requiring skin grafts in seconds
They claimed that lowering the temperature would increase the length of exposure required for severe burns, giving the victim time to deal with the spill.
McDonalds, it turned out, had received 700 prior complaints of burns, and had settled with some of the victims.
The quality control manager for McDonalds testified that the number of injuries (given how many cups of coffee McDonalds served) was not sufficient to cause McDonalds to reexamine its practices.

51. Liebeck v McDonalds (1994) 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
The jury used comparative negligence, and found McDonalds 80% responsible for the injury
They calculated compensatory damages as $200,000, which they reduced to $160,000
And they added $2.9 million in punitive damages
The judge reduced the punitive damages to three times compensatory damages, making the total award $640,000
during appeal, the parties settled out of court for some amount less than that.
In this case, the jury seemed to be using punitive damages to punish McDonalds for being arrogant and uncaring. (The quality control guy from McDonalds was apparently a complete jerk on the stand.)

52. What is the economic purpose of punitive damages?
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
We’ve noted all along that when compensatory damages are perfect, incentives for precaution are set correctly. So what is the purpose of punitive damages?
Cooter and Ulen give one economic justification
They give the example of a manufacturer who can spend $9000 in quality control to eliminate 10 accidents a year, each causing $1000 worth of damage
Clearly, this is efficient precaution, and therefore desirable.
If every accident victim will bring a lawsuit and receive damages, the company has an incentive to spend the money
However, if some of the victims will not – because they aren’t award of what caused the accident, or can’t prove it – then there is not a sufficient incentive to take precaution.
Suppose half the victims will bring successful lawsuits. Compensatory damages in these cases would total $5000; the company is better off paying this than taking efficient precaution.
One way to fix this is to increase damages when they are awarded
We pointed out Tuesday that a rule which randomly threw out half the cases brought, and doubled the damages in the other ones, would give the same incentives for precaution
Here, the logic is the same. Punitive damages can be added to compensatory damages to correct for the fact that not every victim will successfully sue; done right, this restores efficient incentives for precaution.

53. This suggests…
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 punitive damages should be related to compensatory damages, but higher the more likely the injurer is to “get away with it”
If the probability of being successfully sued is 1/10, then total damages should be ten times the actual harm done, in order to create the right incentive; this requires punitive damages 9 times as great as compensatory damages.
This sort of logic seems most appropriate when the injurer’s actions were deliberately fraudulent, since they may have been based on a cost-benefit analysis of the likelihood of getting caught
Allowing punitive damages in these cases again causes the injurer to internalize the expected costs of his actions.
Historically, punitive damages have always been paid to the victim, which seems arbitrary
victim is already being made whole by compensatory damages
creates a much greater incentive to sue – accidents become jackpots
some states now have laws that a share of punitive damages goes to the state
this creates its own set of issues, since the state now has a vested interest in victims being awarded punitive damages!
In terms of setting the injurer’s incentives (or “punishing” him after the fact), it doesn’t matter where the money goes – setting it on fire would achieve those purposes
But would obviously be inefficient…

54. Some empirical observations about tort system in the U. S
Some empirical observations about tort system in the U.S. (won’t get to this)

55. U.S. tort system
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

56. U.S. tort system 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

57. U.S. tort system 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

58. U.S. tort system 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
Cooter and Ulen cite a recent product liability survey of CEOs finding that “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.”
The liability standard in many product-related accidents is “strict products liability”, which holds that a manufacturer is liable if the product is determined to have been defective. This can take three forms:
a defect in design – as in cases where the design of a car’s gas tank made it liable to explode
a defect in manufacture – a bolt is left off a lawn mower during assembly, or not tightened all the way; a piece flies off and injures a user
a defect in warning – the manufacturer fails to warn consumers about the dangers the product poses
One might expect precaution to be pretty unilateral – the manufacturer designs and builds the product – and so a strict liability rule might make sense
However, there are elements of bilateral precaution
People get injured turning their lawnmowers sideways to trip hedges.
C&U suggest holding manufacturers strictly liable for defective design, manufacture, or warnings, but not liable when victims misuse the product or “voluntarily assume the risk of injury”
(This is strict liability with a defense of contributory negligence)
(Basically, holding the manufacturer liable in these cases means forcing them to provide insurance for their customers, which is probably inefficient.)
They discuss attempts to reform product liability laws, in response to rising rates for liability insurance; some states put caps on damages. They give some unconvincing numbers, but point out that product-liability insurance costs are on the order of a quarter of a cent for each dollar of purchase price, which doesn’t seem all that problematic.
As I mentioned the other day, if you’re interested, the paper by Schwartz spends some time looking at evidence of the effect of tort law – that is, how actual accident rates have responded to changes in liability rules – in a number of different industries.

59. Vaccines 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
Recall a silly example from several lectures ago:
I stop a friend to chat in the street, he later gets hit by a falling safe that wouldn’t have hit him if we hadn’t talked
In a sense, I caused his death
but I didn’t raise the ex-ante probability of it happening (I was as likely to cause him to miss the safe as to get hit by it), so I shouldn’t be held liable.
Liability for vaccines is sort of an analogous situation
Many vaccines for diseases are based on a weakened version of the disease itself, causing your body to develop a natural immunity to it.
Thus, while they make you much less likely for you to acquire the disease, there is usually a very slim chance of contracting the disease directly from the vaccine.
For example, the Sabin polio vaccine, which replaced the weaker Salk vaccine and basically wiped out polio, also causes 1 out of every 4,000,000 people who receive the vaccination to contract polio.
A 1974 case established that the maker had to warn its consumers about this risk; since then, vaccines always come with warnings about the risks.
Since then, however, a couple of people have been awarded damages after their children developed polio from the vaccine.
If liability cannot be avoided through due care and warnings, it ends up built into the cost of the drug.
Worse, it discourages companies from developing beneficial vaccines.
The book gives a couple of examples – a 1976 outbreak of swine flu, and a more recent shortage of a vaccine against whooping cough – where a company refused to market a vaccine because it could not get liability insurance.
In the first case, the government stepped in, basically ordering the company to produce the vaccine and assuming liability for itself.

60. Mass torts
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…
Cooter and Ulen wrap up with a brief discussion of mass torts – situations where many people have been harmed in the same way, by the same plaintiff.
Since the health risks of asbestos became widely known, over 600,000 people have come forward with lawsuits against 6000 different defendants
Many of the claimants do not yet have, and may never get, an asbestos-related disease.
Complicating things is that every state has a statute of limitations, a time by which actions must be started.
One estimate is that asbestos litigation has already cost $50 billion, with less than half of that actually going to the victims; estimates are that future litigation will be even more costly.
They don’t give much content about mass torts, other than to point out that courts have shown a willingness to use some creativity in handling the situations
One example: the case of DES, a drug administered to pregnant women in the 1950s to prevent miscarriages, which was later found to lead to cervical cancer and other problems
It was impossible to establish which firm had produced the dose that was given to a particular woman
The California Supreme Court introduced the concept of “market share liability” – all manufacturers of DES were held liable for the harm, in proportion to their market share at the time.
In this case, as in many others, victims did not all sue individually; large groups of plaintiffs were handled together.
This is the idea of a class action lawsuit – a simultaneous lawsuit brought by lots of plaintiffs who were all harmed in the same way
We’ll come back to this
On the one hand, this gets around the problem of small, dispersed harms
Remember our example from earlier: if a firm’s actions do $100 of damage to each of 10,000 people, it won’t be worth anyone’s time to sue
But if someone can sue at once on behalf of all 10,000, the lawsuit will get brought, which means there is an incentive to take efficient precaution
On the other hand…

61. Cooter and Ulen’s overall assessment of U.S. tort system
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

62. To wrap up tort law, a funny story from Friedman…
“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.”