Economic Theories of Legal Liability

Abstract

M ost civil disputes concern liability. The defendant is liable when the law requires him to pay damages for harm done to the plaintiff. Legal scholars discuss at least three objectives of liability law: compensating victims, deterring injurers, and spreading risk. Economic theories, in contrast, tend to understand liability law as a search for efficiency in incentives and risk-bearing.This essay synthesizes and re-conceptualizes some central results of the economic analysis of liability law and sketches the legal details that drive them. Three different legal mechanisms for creating efficient incentives are examined in turn. The first mechanism uses the legal rule of strict liability to internalize costs. The second mechanism uses a negligence standard to create and enforce efficient standards of behavior. The third mechanism uses law to channel transactions into voluntary exchange. The initial explanation of the three mechanisms makes simplifying assumptions of perfect information, solvency, costless dispute resolution and risk neutrality, before examining the results of relaxing these assumptions. The rules of the three major bodies of liability law -property, contracts and torts-will be analyzed as examples within these three mechanisms. Contract law concerns broken promises, tort law concerns accidental or intentional harm to people or property, and property law concerns appropriation of ownership rights or interference with them.

On the Joint Use of Liability and Safety Regulation

“…The following proposition shows that the essential finding of 12 The damage multiplier 1 q is sometimes called punitive multiple (see Cooter andUlen, 1988, or Cooter, 1991). Shavell (1984a), which says that joint use of regulation and liability can be strictly welfare increasing, does not hold, provided that the magnitude of liability is given by Lemma 1.…”

The monopolistic polluter under environmental liability law: incentives for abatement and R&D

“…A legal principle that is frequently invoked when determining such due behavioral standards is the so-called 'Learned Hand rule,' which can be interpreted in our context to require that the standard be set to minimize the sum of environmental harm and abatement costs (see, e.g., Brown 1973, Cooter 1991. We therefore presume that the policy maker will implement a standard for end-of-pipe abatement set at the abatement level that solves…”

Long-term Liability and the Choice of Liquidation

“…Victims are compensated fully for any damage or injury suffered, and so implicit insurance is provided. For a fuller discussion of these points, see, amongst many others, Cooter (1991).…”