Welfare Implications of Costly Litigation for the Level of Liability, The

Competition Policy and Antitrust

Article Snapshot

Author(s)

A. Mitchell Polinsky and Daniel Rubinfeld

Source

NBER Working Paper #1834; The Journal of Legal Studies, Vol. XVII, No. 1, pp. 151-164, January 1988; Economics of Evidence, Procedure and Litigation, Chris William Sanchirico, ed., Northhampton, MA: Edward Elgar Publishing, 2007

Summary

This paper asks how courts should decide how much someone who injures another should pay.

Policy Relevance

To avoid high litigation costs or other wasteful behavior, it can make sense for courts to award an injured party more or less than his loss.

Main Points

  • When someone injures another person (e.g. in an accident), it makes sense to ask the injurer to pay an amount of compensation that will make him careful to avoid the injury in the future.

  • Everyone is best off when the total of the losses from injuries added to the cost of taking care is as small as possible. If litigation did not cost anything, it makes sense to use a strict liability rule and have the injurer pay compensation equal to the loss from the injury. The injurer will try to minimize the loss and the cost of care.

  • But in reality litigation has costs. If the costs are too much, the injured party might not sue. The problem becomes trying to make the sum of the litigation costs, the loss, and the cost of care as small as possible.

  • Sometimes it will make sense to have a rule that the injurer must pay more than the loss he caused. Then the injurer will be very careful, and this will avoid high litigation costs and high losses.

  • Sometimes it will make sense to have a rule that the injurer will pay less than the loss he caused; otherwise, when litigation costs are low, the victim might sue even when injurer is very careful.

  • When parties can settle their dispute before trial, there will tend to be more lawsuits, but lower costs per lawsuit.

  • Generally, negligence rules are better than strict liability rules at encouraging care without encouraging costly lawsuits. A negligence rule is when the injurer pays only when he was not careful enough.

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