Punitive Damages: An Economic Analysis

Intellectual Property and Competition Policy and Antitrust

Article Snapshot

Author(s)

A. Mitchell Polinsky and Steven M. Shavell

Source

Harvard Law Review, Vol. 111, pp. 869-962, 1998

Summary

This paper looks at how much firms or people who harm others should pay.

Policy Relevance

Punitive damages are often set too high, and should be paid only when it is likely the wrongdoer will not be caught.

Main Points

  • In the United States, courts can fine someone who has injured others substantial amounts to punish him. These “punitive damages” can be large and are controversial.

  • A basic principle of deterrence is that injurers should pay for the actual harm they have done, not less, not more; they should not pay for potential harm or repay gains.
    • If they pay more, products will cost more and people will hesitate to undertake economic projects that would benefit everyone. Courts rarely consider this.

  • “Punitive damages” make sense only when injurers are likely to escape paying for harm they have done. Then they should pay extra, so others recognize the behavior as risky. 
    • There is always some chance injurers will escape paying, but punitive damages should be paid only when the chance is high.

  • It makes sense to award punitive damages when a car dealer repaints cars before selling them to conceal damage. But it makes no sense when an oil tanker spills a lot of oil, because this is likely to be detected.

  • Another goal of punitive damages is punishing bad people. This makes less sense when the injurer is a corporation, because “bad people” are unlikely to be the ones who pay.

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