A simple model of efficient tort liability rules

International Review of Law and Economics

Volumn 18, Issue 2, 1998, Pages 201-215

  Feldman, Allan M ^a   Frost, John M ^a  

^a BROWN UNIVERSITY   (United States)

Author keywords

[No Author keywords available]

Indexed keywords

EID: 0010074317     PISSN: 01448188     EISSN: None     Source Type: Journal    
DOI: 10.1016/S0144-8188(98)00006-4     Document Type: Article

References (39)

1. 159 F.2d 169 (2d Cir. 1947).
2. Id. at 173.
3. This is a large literature and we can only touch upon it here. In his pathbreaking article, "Toward an Economic Theory of Liability," 2 Journal of Legal Studies 323 (1973), John Brown introduced the first formal economic model of torts. Brown and most of his followers assumed risk-neutral and homogeneous agents. Steven Shavell, in "Strict Liability versus Negligence," 9 Journal of Legal Studies 1 (1980), and A. Mitchell Polinsky, in "Strict Liability vs. Negligence in a Market Setting," 70 American Economic Review 363 (1980), extended Brown's analysis to consider the ramifications of parties having differential knowledge of risk (i.e., likelihood of accident) and firm entry and exit, respectively. David Haddock and Christopher Curran, in "An Economic Theory of Comparative Negligence," 14 Journal of Legal Studies 49 (1985), used Brown's framework to analyze two broad categories of comparative negligence: pure comparative negligence and a 50% threshold rule. Samuel A. Rea, Jr., in "The Economics of Comparative Negligence," 7 International Review of Law and Economics 149 (1987), extended Haddock and Curran's analysis to consider when parties took action sequentially, rather than simultaneously. Winand Emons, in "Efficient Liability Rules for an Economy with Non-Identical Individuals," 42 Journal of Public Economics 89 (1990), analyzed the implications of heterogeneous individuals within the Brown model. Finally, Lynda Thoman, in "Strict Liability and Negligence Rules when the Product is Information," 44 Economics Letters 205 (1994), analyzed the implications of the model in a principal-agent framework.
4. This is a large literature and we can only touch upon it here. In his pathbreaking article, "Toward an Economic Theory of Liability," 2 Journal of Legal Studies 323 (1973), John Brown introduced the first formal economic model of torts. Brown and most of his followers assumed risk-neutral and homogeneous agents. Steven Shavell, in "Strict Liability versus Negligence," 9 Journal of Legal Studies 1 (1980), and A. Mitchell Polinsky, in "Strict Liability vs. Negligence in a Market Setting," 70 American Economic Review 363 (1980), extended Brown's analysis to consider the ramifications of parties having differential knowledge of risk (i.e., likelihood of accident) and firm entry and exit, respectively. David Haddock and Christopher Curran, in "An Economic Theory of Comparative Negligence," 14 Journal of Legal Studies 49 (1985), used Brown's framework to analyze two broad categories of comparative negligence: pure comparative negligence and a 50% threshold rule. Samuel A. Rea, Jr., in "The Economics of Comparative Negligence," 7 International Review of Law and Economics 149 (1987), extended Haddock and Curran's analysis to consider when parties took action sequentially, rather than simultaneously. Winand Emons, in "Efficient Liability Rules for an Economy with Non-Identical Individuals," 42 Journal of Public Economics 89 (1990), analyzed the implications of heterogeneous individuals within the Brown model. Finally, Lynda Thoman, in "Strict Liability and Negligence Rules when the Product is Information," 44 Economics Letters 205 (1994), analyzed the implications of the model in a principal-agent framework.
5. This is a large literature and we can only touch upon it here. In his pathbreaking article, "Toward an Economic Theory of Liability," 2 Journal of Legal Studies 323 (1973), John Brown introduced the first formal economic model of torts. Brown and most of his followers assumed risk-neutral and homogeneous agents. Steven Shavell, in "Strict Liability versus Negligence," 9 Journal of Legal Studies 1 (1980), and A. Mitchell Polinsky, in "Strict Liability vs. Negligence in a Market Setting," 70 American Economic Review 363 (1980), extended Brown's analysis to consider the ramifications of parties having differential knowledge of risk (i.e., likelihood of accident) and firm entry and exit, respectively. David Haddock and Christopher Curran, in "An Economic Theory of Comparative Negligence," 14 Journal of Legal Studies 49 (1985), used Brown's framework to analyze two broad categories of comparative negligence: pure comparative negligence and a 50% threshold rule. Samuel A. Rea, Jr., in "The Economics of Comparative Negligence," 7 International Review of Law and Economics 149 (1987), extended Haddock and Curran's analysis to consider when parties took action sequentially, rather than simultaneously. Winand Emons, in "Efficient Liability Rules for an Economy with Non-Identical Individuals," 42 Journal of Public Economics 89 (1990), analyzed the implications of heterogeneous individuals within the Brown model. Finally, Lynda Thoman, in "Strict Liability and Negligence Rules when the Product is Information," 44 Economics Letters 205 (1994), analyzed the implications of the model in a principal-agent framework.
6. This is a large literature and we can only touch upon it here. In his pathbreaking article, "Toward an Economic Theory of Liability," 2 Journal of Legal Studies 323 (1973), John Brown introduced the first formal economic model of torts. Brown and most of his followers assumed risk-neutral and homogeneous agents. Steven Shavell, in "Strict Liability versus Negligence," 9 Journal of Legal Studies 1 (1980), and A. Mitchell Polinsky, in "Strict Liability vs. Negligence in a Market Setting," 70 American Economic Review 363 (1980), extended Brown's analysis to consider the ramifications of parties having differential knowledge of risk (i.e., likelihood of accident) and firm entry and exit, respectively. David Haddock and Christopher Curran, in "An Economic Theory of Comparative Negligence," 14 Journal of Legal Studies 49 (1985), used Brown's framework to analyze two broad categories of comparative negligence: pure comparative negligence and a 50% threshold rule. Samuel A. Rea, Jr., in "The Economics of Comparative Negligence," 7 International Review of Law and Economics 149 (1987), extended Haddock and Curran's analysis to consider when parties took action sequentially, rather than simultaneously. Winand Emons, in "Efficient Liability Rules for an Economy with Non-Identical Individuals," 42 Journal of Public Economics 89 (1990), analyzed the implications of heterogeneous individuals within the Brown model. Finally, Lynda Thoman, in "Strict Liability and Negligence Rules when the Product is Information," 44 Economics Letters 205 (1994), analyzed the implications of the model in a principal-agent framework.
7. This is a large literature and we can only touch upon it here. In his pathbreaking article, "Toward an Economic Theory of Liability," 2 Journal of Legal Studies 323 (1973), John Brown introduced the first formal economic model of torts. Brown and most of his followers assumed risk-neutral and homogeneous agents. Steven Shavell, in "Strict Liability versus Negligence," 9 Journal of Legal Studies 1 (1980), and A. Mitchell Polinsky, in "Strict Liability vs. Negligence in a Market Setting," 70 American Economic Review 363 (1980), extended Brown's analysis to consider the ramifications of parties having differential knowledge of risk (i.e., likelihood of accident) and firm entry and exit, respectively. David Haddock and Christopher Curran, in "An Economic Theory of Comparative Negligence," 14 Journal of Legal Studies 49 (1985), used Brown's framework to analyze two broad categories of comparative negligence: pure comparative negligence and a 50% threshold rule. Samuel A. Rea, Jr., in "The Economics of Comparative Negligence," 7 International Review of Law and Economics 149 (1987), extended Haddock and Curran's analysis to consider when parties took action sequentially, rather than simultaneously. Winand Emons, in "Efficient Liability Rules for an Economy with Non-Identical Individuals," 42 Journal of Public Economics 89 (1990), analyzed the implications of heterogeneous individuals within the Brown model. Finally, Lynda Thoman, in "Strict Liability and Negligence Rules when the Product is Information," 44 Economics Letters 205 (1994), analyzed the implications of the model in a principal-agent framework.
8. This is a large literature and we can only touch upon it here. In his pathbreaking article, "Toward an Economic Theory of Liability," 2 Journal of Legal Studies 323 (1973), John Brown introduced the first formal economic model of torts. Brown and most of his followers assumed risk-neutral and homogeneous agents. Steven Shavell, in "Strict Liability versus Negligence," 9 Journal of Legal Studies 1 (1980), and A. Mitchell Polinsky, in "Strict Liability vs. Negligence in a Market Setting," 70 American Economic Review 363 (1980), extended Brown's analysis to consider the ramifications of parties having differential knowledge of risk (i.e., likelihood of accident) and firm entry and exit, respectively. David Haddock and Christopher Curran, in "An Economic Theory of Comparative Negligence," 14 Journal of Legal Studies 49 (1985), used Brown's framework to analyze two broad categories of comparative negligence: pure comparative negligence and a 50% threshold rule. Samuel A. Rea, Jr., in "The Economics of Comparative Negligence," 7 International Review of Law and Economics 149 (1987), extended Haddock and Curran's analysis to consider when parties took action sequentially, rather than simultaneously. Winand Emons, in "Efficient Liability Rules for an Economy with Non-Identical Individuals," 42 Journal of Public Economics 89 (1990), analyzed the implications of heterogeneous individuals within the Brown model. Finally, Lynda Thoman, in "Strict Liability and Negligence Rules when the Product is Information," 44 Economics Letters 205 (1994), analyzed the implications of the model in a principal-agent framework.
9. This is a large literature and we can only touch upon it here. In his pathbreaking article, "Toward an Economic Theory of Liability," 2 Journal of Legal Studies 323 (1973), John Brown introduced the first formal economic model of torts. Brown and most of his followers assumed risk-neutral and homogeneous agents. Steven Shavell, in "Strict Liability versus Negligence," 9 Journal of Legal Studies 1 (1980), and A. Mitchell Polinsky, in "Strict Liability vs. Negligence in a Market Setting," 70 American Economic Review 363 (1980), extended Brown's analysis to consider the ramifications of parties having differential knowledge of risk (i.e., likelihood of accident) and firm entry and exit, respectively. David Haddock and Christopher Curran, in "An Economic Theory of Comparative Negligence," 14 Journal of Legal Studies 49 (1985), used Brown's framework to analyze two broad categories of comparative negligence: pure comparative negligence and a 50% threshold rule. Samuel A. Rea, Jr., in "The Economics of Comparative Negligence," 7 International Review of Law and Economics 149 (1987), extended Haddock and Curran's analysis to consider when parties took action sequentially, rather than simultaneously. Winand Emons, in "Efficient Liability Rules for an Economy with Non-Identical Individuals," 42 Journal of Public Economics 89 (1990), analyzed the implications of heterogeneous individuals within the Brown model. Finally, Lynda Thoman, in "Strict Liability and Negligence Rules when the Product is Information," 44 Economics Letters 205 (1994), analyzed the implications of the model in a principal-agent framework.
10. In particular, is it a game-theoretic or Nash equilibrium? That is, does each party maximize his welfare, given the liability rule in force and the behavior of the other party?
11. In the Mathematical Appendix we allow for multiple defendants.
12. William M. Landes and Richard A. Posner, The Economic Structure of Tort Law (Cambridge, MA: Harvard University Press, 1987).
13. See also Mark F. Grady, "Legal Evolution and Precedent," 3 Annual Review of Law & Ethics 147 (1995), who argues that the dichotomous nature of liability may be key to understanding how common-law rules develop.
14. Guido Calabresi and Jon T. Hirschoff, "Toward a Test for Strict Liability in Torts," 81 Yale Law Journal 1055, 1059 (1972).
15. The reverse Hand rule of Table 1 corresponds to Brown's rule of strict liability with contributory negligence. See supra note 3, p. 328.
16. Note that we exclude side payments between the plaintiff and the defendant, which would guarantee efficiency regardless of the liability rule. The classic statement of this result appears in R. H. Coase, "The Problem of Social Cost," 3 Journal of Law and Economics 1 (1960).
17. All the outcomes shown in Table 2 are Nash equilibria. See supra note 4 and Proposition 1 in the Mathematical Appendix.
18. D = $30, should find negligence on the part of the defendant when he spends $0.
19. Once again this contrasts with the results of the continuous cost-of-precaution models. But cf. supra note 12.
20. Supra note 8, p. 1058.
21. 20 Ill. 478 (1858).
22. W. Page Keeton, Dan B. Dobbs, Robert E. Keeton, and David G. Owen, Prosser and Keeton on the Law of Torts, 5th ed., p. 470 (1984).
23. Id.
24. Id.
25. p, and therefore under the reverse Hand rule plaintiff bears the burden.
26. Brown, supra note 3, pp. 328-329, emphasized this symmetry.
27. In practice, what is commonly called strict liability is usually some offshoot of negligence, and it rarely means liability on the part of the injurer in every possible case. In fact, the rules we discuss in Section III are called strict liability rules by Guido Calabresi and Alvin Klevorick in "Four Tests for Liability in Torts," 14 Journal of Legal Studies 585 (1985), although we do not refer to them as such. Stephen G. Gilles, in "Negligence, Strict Liability, and the Cheapest Cost-Avoider," 78 Virginia Law Review 1291, 1293 (1992), notes that what we call strict liability is "tantamount to absolute liability," and that it is "inefficient, except in unusual cases." Table 2 illustrates exactly when strict liability is efficient, when it is inefficient, and why.
28. In practice, what is commonly called strict liability is usually some offshoot of negligence, and it rarely means liability on the part of the injurer in every possible case. In fact, the rules we discuss in Section III are called strict liability rules by Guido Calabresi and Alvin Klevorick in "Four Tests for Liability in Torts," 14 Journal of Legal Studies 585 (1985), although we do not refer to them as such. Stephen G. Gilles, in "Negligence, Strict Liability, and the Cheapest Cost-Avoider," 78 Virginia Law Review 1291, 1293 (1992), notes that what we call strict liability is "tantamount to absolute liability," and that it is "inefficient, except in unusual cases." Table 2 illustrates exactly when strict liability is efficient, when it is inefficient, and why.
29. See Calabresi and Klevorick, supra note 21.
30. Id. at 591.
31. See Steven Shavell, "The Judgment Proof Problem," 6 International Review of Law and Economics 45 (1986), for an analysis of this problem.
32. Brown, supra note 3, p. 329.
33. For an analysis of other comparative negligence rules, see the Mathematical Appendix.
34. Mark F. Grady, in "Untaken Precautions," 18 Journal of Legal Studies 139 (1989), observed that rather than perform complicated cost-benefit calculations on a continuum of potential actions, judges identify a limited number of specific precautionary actions that the parties could have taken and then apply the Hand formula to determine liability. He emphasized, id. p. 139, that "[t]he key question the courts ask is what particular precautions the [plaintiff or] defendant could have taken but did not."
35. But cf. supra note 12.
36. The Mathematical Appendix deals with some of these complications.
37. Note that ℓ corresponds to πL in the text. We drop the redundant notation here.
38. j = 0 for all j ≠ i. In general, - i means all j ≠ i. 32 This is the rule of relative negligence referred to in Section III.
39. Contrast this result with the models of Rea, and Haddock and Curran, supra note 3, where precaution is a continuous variable for both the plaintiff and the defendant, and any arbitrary assignment of comparative liability leads to the efficient amount of care.