Decoupling Liability: Optimal Incentives for Care and Litigation

Intellectual Property and Competition Policy and Antitrust

Article Snapshot

Author(s)

Yeon-Koo Che and A. Mitchell Polinsky

Source

RAND Journal of Economics, Vol. 22, No. 4, pp. 562, Winter 1991

Summary

This article looks at who should be paid damages in a successful lawsuit.

Policy Relevance

To discourage risky behavior, defendants should pay the highest fines possible, but it should go to the state rather than to the plaintiff.

Main Points

  • Often, when a plaintiff wins a lawsuit against a defendant, the plaintiff receives the entire amount of damages the court orders the defendant to pay.

  • In some states, liability is “decoupled.” The defendant is ordered to pay a very high amount, but some of it goes to the state, not to the plaintiff.

  • Liability is decoupled to encourage defendants to take great care in future to avoid doing harm again, but to avoid encouraging plaintiffs to sue more often and raise litigation costs.
    • Decoupling liability will also encourage cases to settle before trial, because plaintiffs will be willing to accept less and defendants more eager to settle.

  • The defendant should be made to pay the highest amount possible.

  • Sometimes it might be helpful for courts to monitor and decouple settlements.

  • The case for decoupling liability is strongest with strict liability cases, when the defendant is doing something like blasting with dynamite that is very dangerous. But it also makes sense in negligence cases.

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