1. Law and Economics-Charles W. Upton Extensions of the Model

2. Extensions Vicarious Liability Joint and Several Liability The Standard of Liability Damages from Death Risk Adjustment

3. Extensions of the Model Vicarious Liability Generally, you are responsible for the acts of your children

4. Extensions of the Model Vicarious Liability Generally, you are responsible for the acts of your children An employer is often responsible for employee acts.

5. Extensions of the Model Vicarious Liability Generally, you are responsible for the acts of your children An employer is often responsible for employee acts. At one time, a husband was responsible for the acts of his wife.

6. Extensions of the Model Joint and Several Liability I am walking along a sidewalk. A car hits a pothole, swerves, and hits me..

7. Extensions of the Model Joint and Several Liability I am walking along a sidewalk. A car hits a pothole, swerves, and hits me. –I meet any appropriate standard of precaution. –The injury is the dual fault of the driver for not watching for the pothole and the city for not filling it. – Whom can I sue?

8. Extensions of the Model An Operation I have an operation and something goes wrong. Is it the fault of the anesthetist or the surgeon? Who knows?

9. Extensions of the Model An Operation I have an operation and something goes wrong. Is it the fault of the anesthetist or the surgeon? Who knows? Common law said I could sue either party and recover the full damages from either source.

10. Extensions of the Model An Operation I have an operation and something goes wrong. Is it the fault of the anesthetist or the surgeon? Who knows? Common law said I could sue either party and recover the full damages from either source. –This has been mitigated recently. –Obviously there is a deep pockets argument to maintain the rule, at least from the point of view of the bar.

11. Extensions of the Model The Economics Both parties must exercise reasonable precaution. Suppose the damage is D; the probability of an injury is p(x i,x j ), where “i” and “j” are two potential injurers.

12. Extensions of the Model The Economics We want to minimize p(x i,x j )D + w i x i + w j x j

13. Extensions of the Model The Economics We want to minimize p(x i,x j )D + w i x i + w j x j That requires that p i D + w i = 0 p j D + w j = 0

14. Extensions of the Model The Economics We want to minimize p(x i,x j )D + w i x i + w j x j That requires that p i D + w i = 0 p j D + w j = 0 Both parties must be liable for the full cost of the accident.

15. Extensions of the Model The Standard of Liability Traditionally the rule was negligence with contributory negligence. Most states now adopt comparative negligence except when products are involved.

16. Extensions of the Model The Standard of Liability Traditionally the rule was negligence with contributory negligence. Most states now adopt comparative negligence except when products are involved. I am going 65 in a 30 zone, and you are going 35. I hit and injure you.

17. Extensions of the Model The Standard of Liability Traditionally the rule was negligence with contributory negligence. Most states now adopt comparative negligence except when products are involved. I am going 65 in a 30 zone, and you are going 35. I hit and injure you. Under a rule of negligence with contributory negligence, I am off the hook.

18. Extensions of the Model The Standard of Liability Traditionally the rule was negligence with contributory negligence. Most states now adopt comparative negligence except when products are involved. I am going 65 in a 30 zone, and you are going 35. I hit and injure you. Under a rule of negligence with contributory negligence, I am off the hook. The modern rule would make me liable, but not fully liable (you are, after all, doing 35).

19. Extensions of the Model Does this Make Sense Suppose I do not know the right standard, but have a probability Z(x) like that shown. 1 0 x x*

20. Extensions of the Model Does this Make Sense Suppose I do not know the right standard, but have a probability Z(x) like that shown. My best guess is x*. Even if I exercise x**>x* units of precaution, I still have a certain risk of being held liable. 1 0 x x*

21. Extensions of the Model The Standard of Liability Now my problem changes. I must now invest in safety. I am now liable for p(x)Z(x)D - x Hitherto, Z(x) = 1 for x x*. No Longer. 1 0 x x*

22. Extensions of the Model The Standard of Liability Now my problem changes. I must now invest in safety. I am now liable for p(x)Z(x)D - x Hitherto, Z(x) = 1 for x x*. No Longer. 1 0 x x* This makes me want to be careful

23. Extensions of the Model Damages from Death For years you could not recover in the case of death. Thus if my wife died in an accident, I could recover for my loss, but not her loss. In fact, it is possible to estimate the damages.

24. Extensions of the Model Damages from Death For years you could not recover in the case of death. Thus if my wife died in an accident, I could recover for my loss, but not her loss. In fact, it is possible to estimate the damages. She has an indifference curve between income and the probability of death I(X,p), and you can figure her MRS between money and probability of death.

25. Extensions of the Model Calculating the Demanges Suppose she behaves so that she is indifferent between an additional 1% chance of dying and $10,000. The right amount to award for a death is $1,000,000.

26. Extensions of the Model Calculating the Demanges Suppose she behaves so that she is indifferent between an additional 1% chance of dying and $10,000. The right amount to award for a death is $1,000,000. This is not saying that I am indifferent between having my wife and $1,000,000, nor that my wife is indifferent between living and me having an additional $1,000,000

27. Extensions of the Model Calculating the Demanges Suppose she behaves so that she is indifferent between an additional 1% chance of dying and $10,000. The right amount to award for a death is $1,000,000. This is not saying that I am indifferent between having my wife and $1,000,000, nor that my wife is indifferent between living and me having an additional $1,000,000 But we observe all sorts of cases where my wife takes risks of death, and this gives the driver the right incentive to change his behavior.

28. Extensions of the Model Risk Adjustment How should damages be computed?

29. Extensions of the Model Risk Adjustment How should damages be computed? Standard economic theory is that damages should be computed to make someone whole. –That is, they should be restored to the same indifference curve.

30. Extensions of the Model Risk Adjustment How should damages be computed? Standard economic theory is that damages should be computed to make someone whole. –That is, they should be restored to the same indifference curve. While messy computationally, it is simple economics.

31. Extensions of the Model End ©2004 Charles W. Upton