A guided tour through the literature

In this section we shall provide a pathfinder through the existing law and economics literature on torts. The listings are by necessity limited to some of the more representative contributions.

Textbooks on tort law and economics

Shavell (1987) and Landes and Posner (1987) were the first systematic treat­ments of the topic. Although outdated, they remain the fundamental reference for tort law and economics. Miceli (2004, chs 2 and 3) provides a more recent, simple and rigorous formal treatment of the theory. Cooter and Ulen (2004, chs 8 and 9) add a discussion of contemporary issues.

The origin of the economic approach to tort law

Coase (1960) yielded an intellectual revolution in the way scholars consid­ered the problem of externalities (accidents) in two ways. First, it put forward the reciprocal nature of accidents as both victims and injurers are to be considered as joint inputs to the externality. Hence, simply making the injurer pay may not be the optimal solution. Second, it raised the question of why we need tort law if market exchange can do the job. Calabresi (1961, 1970), whose work may be considered as the intellectual response to the first prob­lem, analysed different liability rules against the goals of providing incentives to reduce the total accident costs (precaution costs plus expected harm), the risk-bearing cost and the administrative costs of the system. Calabresi and Melamed (1972) provided an answer to the second problem, by arguing that tort law is needed in situations in which transaction costs prevent parties from bargaining (but the discussion on this point is open to date). Brown (1973) formalized this framework in the now standard economic model of torts.

Incentives to take precaution: the fundamental results

Under the simple assumptions of the Brown model, two main results have been derived with respect to incentives: first, Landes and Posner (1980) showed that any liability rule that features a negligence defence leads to both the injurer(s) and the victim taking optimal care; second, Shavell (1980a) proved that no such rule can induce both parties to take the optimal level of activity (defined as including all precautionary measures not explicitly in­cluded in the negligence inquiry).

Incentives to acquire information about risk

Liability rules also serve another important goal besides those indicated by Calabresi (1970): they induce the residual bearer to acquire information in order to reduce the loss he/she bears. These incentives are distinct from the incentives to take optimal precaution. Posner (1973) raised the issue, Shavell (1992) analysed it in a formal model.

Risk allocation and insurance

Concerning the allocation of risk, the liability system is said to be compara­tively more expensive than insurance, which is in general desirable even if it partially dilutes the incentives towards optimal precaution, as proven in Shavell (2000).

Administrative costs

To date, the economic analysis offers no satisfactory theory concerning the administrative cost of different liability rules. However, a particularly com­mon rule, comparative negligence, seems to be more expensive than other likewise efficient (in the standard model) rules. This puzzling waste of ad­ministrative costs calls for scholarly attention.

Comparative negligence

The literature has moved in the direction of relaxing some of the standard assumptions. Comparative negligence seems to improve incentives when judges make random errors in comparing the due level of care to the level of care actually taken by the parties (evidentiary uncertainty, Cooter and Ulen, 1986) when the standard of care is uniform for all parties but the individual costs of care differ (Rubinfeld, 1987), and when judges err regarding the level of care cost actually borne by parties (Haddock and Curran, 1985). Bar-Gill and Ben-Shahar (2003) criticize part of this approach. The literature is vast and the academic discourse remains open.

Comparative causation

While the apportionment of losses among negligent actors (comparative neg­ligence) is a reality that is difficult to explain, apportioning damages among non-negligent is a profitable solution that is rarely found in actual legal systems, as argued in Parisi and Fon (2004).

Errors, uncertainty and accuracy

The incentive effects of liability rules crucially depend on their correct imple­mentation. Errors or uncertainty in the determination of the damage award, the causal link, or the issue of negligence might distort incentives. See Dia­mond (1974), Calfee and Craswell (1984) and Craswell and Calfee (1986). However, when this does not happen, a certain degree of inaccuracy might help save administrative costs. See Kaplow and Shavell (1994, 1996).

Insolvent and disappearing injurers

If the injurer’s assets are not sufficient to cover the victim’s compensation or if there is a chance that the injurer will not be identified or sued, incentives to take precaution might be diluted. Summers (1983) identified this problem; Shavell (1986) analysed it in connection with insurance; Dari Mattiacci and De Geest (2005) show that the level of precaution that the injurer takes depends on the precaution technology available.

Vicarious liability and mandatory insurance

In response to the two problems mentioned above, liability may be shifted from the insolvent or disappearing injurer to his/her principal in order to give the latter incentive to exercise a delegated control function on the former. Sykes (1981) and Kornhauser (1982) provided the first analysis. Mandatory insurance may serve the same purpose. Dari Mattiacci and Parisi (2003) analyse different such systems of delegated control in a unitary framework.

Punitive damages

If injurers can escape liability, their incentives may be diluted. Their incentives may be corrected by increasing the damages they pay when they are actually apprehended. Punitive damages are hence seen as a corrective mechanism for disappearing injurers. See Cooter (1982) and Polinsky and Shavell (1998).

Pure economic loss

Some losses consist of the victim’s forgone profits. In this case, the market mechanism might cause a third party (for example, a competitor of the victim) to increase his/her profits as a consequence of the accident.

Non-pecuniary loss and compensation for pain and suffering

The economic model of torts is based on the assumption that the victim’s loss (as well as the parties’ precaution costs) may easily be expressed in monetary terms and that monetary compensation can restore the victim to the pre­accident situation. Both assumptions are often not satisfied, raising the two related problems of whether and how much compensation to award, also in connection with the injurer’s incentives. See Arlen (2000, section B), for a survey of both the empirical literature and the economic arguments in favour of and against compensation of such loss.

Product liability

Accidents that occur in connection with products are of a different type from ordinary torts. In fact, the victim (the consumer) and the injurer (the pro­ducer) are parties to a contractual relationship. The Coase theorem applies and, if its conditions are satisfied, the liability rule is irrelevant to the out­come, as parties will bargain around it. However, producers will in general enjoy an informational advantage compared to consumers and, hence, the liability rule might make a substantial difference. Strict liability is in general preferred as it puts the informational burden on the producer (see also sub­section on incentives to acquire information). See Spence (1977).

Joint and several liability

When more than one injurer is responsible for the loss suffered by the victim, a problem arises of how to apportion damages among them. In the standard model, the apportionment rule does not affect the outcome (Landes and Posner, 1980). However, in connection with insolvency and the possibility of settling out of court, the problem becomes relevant and the rules that govern the apportionment of the loss affect the injurers’ incentives.

Causation

The issue of causation is controversial in economics, as both the victim and the injurer may be seen as joint inputs in the production of the accident loss in a Coasean perspective. The analysis has mainly focused on ascertaining the effects of causation on the functioning of the negligence rule (Grady, 1983; Kahan, 1990), on the allocation of damages when there is uncertainty over the causal contribution of several injurers (Shavell, 1985), and on the optimal restriction of the scope of liability (Shavell, 1980b).

Tort liability and regulation

Tort liability as a way of producing incentives to optimal precaution may be compared to the regulatory system, which serves the same purpose. Regula­tion may substitute or complement tort liability when the latter is impaired by problems related to an insolvent or disappearing defendant. Wittman (1977), Shavell (1984a, 1984b), Kolstad et al. (1990), Burrows (1999) and Schmitz (2000).

Litigation

Liability as a system of providing parties with incentives to take precaution relies on the enforcement of the duty to pay damages. The way in which the judicial system functions may affect the incentives produced by tort liability as it affects the victims’ ability to collect from injurers and hence the injurers’ internalization of the victims’ loss. A survey of the ongoing research on the topic may be found in Cooter and Rubinfeld (1989) and Kobayashi and Parker (2000).

History and evolution of tort liability

Economic analysis may also be applied to the study of the genesis and evolution of tort liability in response to changes in society and technology, which in turn affected the nature and the probability of accidents. Posner (1980 and 1981) and Parisi (1992, 2001).

References

Arlen, Jennifer (2000), ‘Tort damages’, in Boudewijn Bouckaert and Gerrit De Geest (eds), Encyclopedia of Law and Economics, vol. II, Cheltenham, UK and Northampton, MA, USA: Edward Elgar, pp.

Bar-Gill, Oren and Omri Ben-Shahar (2003), ‘The uneasy case for comparative negligence?’, 5 American Law and Economics Review, 433-69.

Bishop, William (1982), ‘Economic loss in tort’, 2 Oixford Journal of Legal Studies, 1-29.

Brown, John Prather (1973), ‘Toward an economic theory of liability’, 2 Journal of Legal Studies, 323-49.

Burrows, Paul (1999), ‘Combining regulation and legal liability for the control of external costs’, 19 International Review of Law and Economics, 227-44.

Bussani, Mauro, Vernon Palmer and Francesco Parisi (2003), ‘Liability for pure financial loss in Europe: an economic restatement’, American Journal of Comparative Law, 51, 113-63.

Calabresi, Guido (1961), ‘Some thoughts on risk distribution and the law of torts’, 70 Yale Law Journal, 35-46.

Calabresi, Guido (1970), The Costs of Accidents: A Legal and Economic Analysis, New Haven, CT: Yale University Press.

Calabresi, Guido and A. Douglas Melamed (1972), ‘Property rules, liability rules and inalien­ability: one view of the cathedral’, 85 Harvard Law Review, 1089-28.

Calfee, John E. and Richard Craswell (1984), ‘Some effects of uncertainty on compliance with legal standards’, 70 Virginia Law Review, 965-1003.

Coase, Ronald H. (1960), ‘The problem of social cost’, 3 Journal of Law and Economics, 1-44.

Cooter, Robert D. (1982), ‘Economic analysis of punitive damages’, 56 Southern California Law Review, 79-101.

Cooter, Robert D. and Daniel L. Rubinfeld (1989), ‘Economic analysis of legal disputes and their resolution’, 27 Journal of Economic Literature, 1067-97.

Cooter, Robert D. and Thomas S. Ulen (1986), ‘An economic case for comparative negligence’, 81 New York University Law Review, 1067-110.

Cooter, Robert D. and Thomas S. Ulen (2004), Law and Economics, 4th edn, Reading, MA: Addison-Wesley.

Craswell, Richard and John E. Calfee (1986), ‘Deterrence and uncertain legal standards’, 2 Journal of Law, Economics, and Organization, 279-303.

Dari Mattiacci, Giuseppe and Gerrit De Geest (2005), ‘Judgment proofness under four different precaution technologies’, Journal of 'Institutional and Theoretical Economics, 161, 1-19.

Dari Mattiacci, Giuseppe and Francesco Parisi (2003), ‘The cost of delegated control: vicarious liability, secondary liability and mandatory insurance’, International Review of Law and Economics, 23, 453-75.

Diamond, Peter A. (1974), ‘Single activity accidents’, 3 Journal of Legal Studies, 107-64.

Gilles, Stephen G. (1992), ‘Rule-based negligence and the regulation of activity levels’, 21 Journal of Legal Studies, 319-63.

Grady, Mark F. (1983), ‘A new positive economic theory of negligence’, 92 Yale Law Journal, 799-829.

Haddock, David D. and Christopher Curran (1985), ‘An economic theory of comparative negligence’, 14 Journal ofLegal Studies, 49-72.

Kahan, Marcel (1989), ‘Causation and incentives to take care under the negligence rule’, 18 Journal of Legal Studies, 427-47.

Kaplow, Louis and Steven Shavell (1994), ‘Accuracy in the assessment of liability’, 37 Journal of Law and Economics, 1-15.

Kaplow, Louis and Steven Shavell (1996), ‘Accuracy in the assessment of damages’, 39 Journal of Law and Economics, 191-209.

Kobayashi, Bruce and Jeffry S. Parker (2000), ‘Civil procedure: general’, in Boudewijn Bouckaert and Gerrit De Geest (eds), Encyclopedia of Law and Economics, vol. V, Cheltenham, UK and Northampton, MA, USA: Edward Elgar, pp. 1-26.

Kolstad, Charles D., Thomas S. Ulen and Gary V. Johnson (1990), ‘Ex post liability for harm vs. ex ante safety regulation: substitutes or complements?’, 80 American Economic Review, 888-901.

Kornhauser, Lewis A. (1982), ‘An economic analysis of the choice between enterprise and personal liability for accidents’, 70 California Law Review, 1345-92.

Kornhauser, Lewis A. and Richard L. Revesz (1990), ‘Apportioning damages among potentially insolvent actors’, 19 Journal of Legal Studies, 617-51.

Landes, William M. and Richard A. Posner (1980), ‘Multiple tortfeasors: an economic analy­sis’, 9 Journal of Legal Studies, 517-55.

Landes, William M. and Richard A. Posner (1982) ‘The positive economic theory of tort law’, 15 Georgia Law Review, 851-924.

Landes, William M. and Richard A. Posner (1987), The Economic Structure of Tort Law, Cambridge, MA: Harvard University Press.

McEwin, R. Ian (2000), ‘No-fault compensation systems’, in Boudewijn Bouckaert and Gerrit De Geest (eds), Encyclopedia of Law and Economics, vol. II, Cheltenham, UK and North­ampton, MA, USA: Edward Elgar, pp. 753-63.

Miceli, Thomas J. (2004), The Economic Approach to Law, Stanford, CA: Stanford University Press.

Parisi, Francesco (1992), Liability for Negligence and Judicial Discretion, 2nd edn, Berkeley, CA: University of California Press.

Parisi, Francesco (2001), ‘Genesis of liability in ancient law’, 3 American Law and Economics Review, 82-124.

Parisi, Francesco and Vincy Fon (2004), ‘Comparative causation’, American Law and Econ­omics Review, 6, 345-68.

Polinsky, A. Mitchell and Yeon-Koo Che (1991), ‘Decoupling liability: optimal incentives for care and litigation’, 22 Rand Journal of Economics, 562-70.

Polinsky, A. Mitchell and Steven Shavell (1998), ‘Punitive damages: an economic analysis’, 111 Harvard Law Review, 869-962.

Posner, Richard A. (1973), ‘Strict liability: a comment’, 2 Journal of Legal Studies, 205-21.

Posner, Richard A. (1980), ‘A theory of primitive society, with special reference to law’, 23 Journal of 'Law and Economics 1.

Posner, Richard A. (1981), The Economics of Justice, Cambridge, MA: Harvard University Press.

Rizzo, Mario J. (1982), ‘A theory of economic loss in the law of torts’, 11 Journal of Legal Studies, 281-310.

Rubinfeld, Daniel L. (1987), ‘The efficiency of comparative negligence’, 16 Journal of Legal Studies, 375-94.

Schmitz, Patrick W. (2000), ‘On the joint use of liability and safety regulation’, 20 Inter­national Review of 'Law and Economics, 371-82.

Shavell, Steven (1980a), ‘Strict liability versus negligence’, 9 Journal of Jegal Studies, 1-25.

Shavell, Steven (1980b), ‘An analysis of causation and the scope of liability in the law of torts’, 9 Journal of Legal Studies, 463-516.

Shavell, Steven (1984a), ‘Liability for harm versus regulation for safety’, 13 Journal of Legal Studies, 357-74.

Shavell, Steven (1984b), ‘A model for optimal use of liability and safety regulation’, 15 Rand Journal of Economics, 271-80.

Shavell, Steven (1985), ‘Uncertainty over causation and the determination of civil liability’, 28 Journal of 'Law and Economics, 587-609.

Shavell, Steven (1986), ‘The judgment proof problem’, 6 International Review of Law and Economics, 45-58.

Shavell, Steven (1987), Economic Analysis of Accident Law, Cambridge, MA: Harvard Univer­sity Press.

Shavell, Steven (1992), ‘Liability and the incentives to obtain information about risk’, 21 Journal of Jegal Studies, 259-70.

Shavell, Steven (2000), ‘On the social function and the regulation of liability insurance’, 25 Geneva Papers on Risk and Insurance: Issues and Practice, 166-79.

Spence, A. Michael (1977), ‘Consumer misperceptions, product failure and product liability’, 64 Review of 'Economic Studies, 561-72.

Summers, John (1983), ‘The case of the disappearing defendant: an economic analysis’, 132 Pennsylvania Law Review, 145-85.

Sykes, Alan O. (1981), ‘An efficiency analysis of vicarious liability under the law of agency’, 91 Yale Law Journal, 168-206.

Wittman, Donald (1977), ‘Prior regulation versus post liability: the choice between input and output monitoring’, 6 Journal of'Legal Studies, 193-212.

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