Slide #1.

Economics of Tort Law
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Slide #2.

What is a tort? Contract law: injury from a broken promise  Tort law: injury without any promises  “If someone shoots you, you call a cop. If he runs his car into yours, you call a lawyer.”   Intentional tort (≈ crime) Unintentional tort (accidents) Focus on efficiency: structure the law to provide the correct incentives to avoid/prevent harm
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Slide #3.

Example 1: Joe Potatoes Joe Potatoes has been driven to distraction by the escapades of his wife, Joan Potatoes. At the end of a hard night’s work at the loading dock, Joe is approached by Jim Bloggs. Suspecting that Jim has been romancing Joan, Joe insults and strikes him, breaking his nose. Bloggs subsequently sues for the injury to his reputation and his nose.
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Slide #4.

Example 2: Pheasant Hunting Three hunters go into the woods after pheasants. They are spread out in a straggling line about 25 yards apart, walking in the same direction. The hunter in the center flushes a bird that flies up, its wings pounding. The hunter to his left and right turn toward the bird in the middle and fire. The bird escapes, but the hunter in the middle is blinded by birdshot. One of the two hunters certainly caused the harm, but there is no way of determining which one of them it was. The victim sues both of them.
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Slide #5.

Example 3: Fuel Additives A manufacturer produces auto fuel additives that demand careful control over quality. If quality control is maintained at a high level, the chemical mixture in the product is correct, and it never causes damage to auto engines. If, however, quality control is relaxed and allowed to fall to a low level, some batches of the chemical mixture will be flawed. A few of the cars using the flawed batch will be harmed; specifically, the engine will throw a rod and tear itself to pieces. After the rod is thrown, as alert mechanic can detect the cause of the harm. The manufacturer determines that a high level of control costs more than the harm to some auto engines caused by a low level of quality control, so the manufacturer adopts a low level of quality control. The owner of the damaged car sues the manufacturer and asks for punitive damages.
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Slide #6.

Classroom Experiment  Victor Matheson (2005), “Rationality, Tort Reform and Contingent Valuation: A Classroom Experiment in Starting Point Bias.” College of the Holy Cross Working Paper
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Slide #7.

Focal Point Experiment Reference Point $10,000 $1,000,000 Smallest Damages $100,000 $500,000 Largest Damages $1,000,000 $2,000,000 Median Damages $500,000 $650,000 $1m or less 5 out of 6 4 out of 6
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Slide #8.

Traditional Theory of Torts  Harm    Perfect compensation? Tangible vs intangible losses Causation   Does smoking cigarettes cause cancer? “cause-in-fact”:but for A, would B have occurred?   Can you sue for exposure to harm? If NO, then A is the cause-in-fact of B Proximate cause Breach of duty (fault)   Strict liability: only Harm and Causation matter Negligence: requires Harm, Causation, and Fault
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Slide #9.

How do you determine fault?   Binary fault Continuous fault   not at fault if x ≥ ~ at fault if x < x ~ x Not at fault Negligent Precaution (x) 0 ~ x Legal standard: reasonable person
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Slide #10.

A Trolley Folly “A tree fell on a moving trolley, injuring passengers. One of them sued. He succeeded in demonstrating that in order for the trolley to be where it was when the tree fell on it the driver had to have driven faster than the speed limit at some point during the trip. Breaking the law is per se negligence, so the driver was legally negligent whether or not his driving was actually unsafe. If he had not driven over the speed limit, the trolley would not have been under the tree when it fell, so, the plaintiff argued, the driver’s negligence caused the injury.” The court held that the driver’s negligence “had not caused the accident in the legally relevant sense.”
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Slide #11.

A Model of Optimal Precaution  Social Objective: minimize social costs of accidents     Precaution costs Accident losses Administrative costs Assumptions     Rationality Litigation is costless No insurance available No safety regulation
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Slide #12.

A Model of Optimal Precaution  Define:     x = level of precaution by injurer p(x) = probability of accident [p’(x) < 0] A = victim’s accident losses w = cost per unit of precaution Social Costs = wx + p(x)A What level of x will minimize Social Costs?
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Slide #13.

A Model of Optimal Precaution $ Social Costs = wx + p(x)A SC wx p(x)A x* x* occurs where: Precaution (x) w = -p’(x)A MC of precaution = MB of precaution
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Slide #14.

Examples of Accidents and Precaution Accident Injurer’s precaution Victim’s precaution Faulty wiring causes house fire Manufacture wiring more carefully Fireproof the house Moving car hits parked car Drive more safely Park car in safer location Car hits pedestrian Drive more safety Walk more safely Software fails Better design of software Back up data at risk Exploding pop bottle Improve quality control Handle bottles carefully Medicine causes side effects Improve warning label Study warning on medicine
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Slide #15.

Incentives for Precaution  Tort liability gets injurer to internalize the harm they cause victims  3 Liability Rules    No Liability Strict Liability Negligence rule
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Slide #16.

No Liability  Victim’s Incentives    Victim bears full cost of accident Victim’s cost = wvxv + p(xv)A  Choose xv* Injurer’s Incentives   Injurer faces no liability  Choose xi = 0 Injurer’s cost = wixi
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Slide #17.

Strict Liability  Victim’s Incentives  Victim receives damages of D Victim’s cost = wvxv + p(xv)[A-D]  Victim’s cost = wvxv (if D = A)   Choose xv = 0 Perfect compensation  Injurer’s Incentives  Injurer’s cost = wixi + p(xi)D  Choose xi*
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Slide #18.

No Liability vs Strict Liability Legal Rule Victim’s Precaution Injurer’s Precaution No liability Efficient Zero Zero Efficient Strict liability  Unilateral precaution situations:    When only victim can take precaution, NL is preferable When only injurer can take precaution, SL is preferable Analogous to contract law where we should Bilateral precaution allocate risk to the situations? low-cost avoider.
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Slide #19.

Simple Negligence Rule  Injurer’s Incentives  if x < ~ x then D = A Injurer’s cost = wixi + p(xi)D  ~ if x ≥ x then D = 0 Injurer’s cost = wixi
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Slide #20.

Simple Negligence Rule $ wx + p(x)A wx ~ x = x* Injurer will choose xi* What will victim do? Precaution (x)
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Slide #21.

Contributory Negligence  Negligent injurer can escape liability if victim was also negligent I’m talking on my cell phone while driving, but drunk pedestrian stumbles into road  Victim has incentive to choose xv*  Injurer has incentive to choose xi* Since injurer expects victim to take efficient precaution, injurer will minimize costs by being careful
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Slide #22.

Comparative Negligence  If both parties are negligent, they share the responsibility  Injurer has incentive to choose xi*  Victim has incentive to choose xv*
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Slide #23.

Liability Rule Summary Legal Rule Victim’s Precaution Injurer’s Precaution No liability Efficient Zero Zero Efficient Efficient Efficient Strict liability “Any” negligence rule with efficient standards of care Warning: Activity levels also affect the likelihood of an accident
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Slide #24.

Who bears “residual Efficient Precaution andrisk”? Activity Legal Rule Victim Injurer Precaution Precaution Victim Activity Injurer Activity Efficient Zero Efficient Too High Zero Efficient Too High Efficient Simple Negligence Efficient Efficient Efficient Too High Contributory Negligence Efficient Efficient Efficient Too High Comparative Negligence Efficient Efficient Efficient Too High Strict Liability with CN Efficient Efficient Too High Efficient No Liability Strict Liability
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Slide #25.

Setting the Standard: The Hand Rule  United States v Carroll Towing Company (1947)  Since there are occasions when every willisbreak from her Hand Rule: if w < -p’A then vessel injurer negligent moorings, and since, if she does, she becomes a menace to those about her; the owner’s duty, as in other similar situations, to  Have all cost-justified precautions been taken? provide against resulting injuries is a function of three variables: (1) The probability that she will break away; (2) the gravity of the resultinginjury, if she does; (3) the burden of adequate Case-by-case basis precautions. Possibly it serves to bring this notion into relief to  Regulations state it in algebraic terms: if the probability be called P; the injury, L; and the burden,customs B; liability depends upon whether B is less than  Social L multiplied by P: i.e., whether B < PL. Judge Learned Hand
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Slide #26.

Errors in Damage Awards  Random mistakes Systematic mistakes  Strict Liability     Random mistakes: no effect on precaution Systematic mistakes: xi varies directly with error Negligence Rule  Modest damage errors will not affect xi  xi varies directly with errors in setting the legal standard
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Slide #27.

Administrative Costs Social Cost = wx + p(x)A + C  No Liability: saves on C but erodes incentive for precaution  Strict Liability: requires harm and cause   Leads to more cases, but easier cases Negligence: requires harm, cause, and fault  Leads to fewer cases, but costlier cases
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Slide #28.

Exploding Pop Bottle Behavior of Firm Firm’s Cost Probability Loss if of of Accident Accident Production to Consumer per unit Expected Accident Loss Full Cost per unit Use Bottle 40 cents 1/100,000 $10,000 10 cents 50 cents Use Can 43 cents 1/200,000 $4,000 2 cents 45 cents When consumers have perfect information, the choice of liability rule is irrelevant; every rule generates efficient precaution and output Strict Liability is a substitute for perfect consumer information
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