Faculty Bibliography
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The imposition of punitive damages is one of the more controversial features of the American legal system. Trial and appellate courts have struggled for many years to develop coherent principles for addressing the questions of when punitive damages should be awarded, and at what level. In this Article, Professors Polinsky and Shavell use economic reasoning to provide a relatively simple set of principles for answering these questions, given the goals of deterrence and punishment. With respect to the deterrence objective, on which their Article focuses, they argue that punitive damages ordinarily should be awarded if, and only if, an injurer has a significant chance of escaping liability for the harm he caused. When this condition holds, punitive damages are needed to offset the deterrence-diluting effect of the chance of escaping liability. (They mention as well a deterrence rationale for punitive damages that does not rest on the possibility of escape from liability - that punitive damages may be needed to deprive individuals of the socially illicit gains that they obtain from malicious acts.) Professors Polinsky and Shavell also discuss the tension between the implications of the deterrence objective and present punitive damages law, including the law's emphasis on the reprehensibility of a defendant's conduct and on a defendant's wealth. With respect to the punishment objective, Professors Polinsky and Shavell stress that the imposition of punitive damages on corporations may fail to serve its intended purpose (although the imposition of punitive damages on individual defendants accomplishes punishment in a straightforward manner). Punitive damages against corporations may be ineffective primarily because the payment of punitive damages awards by corporations often does not lead to greater punishment of culpable employees, but instead punishes the corporation's shareholders and customers.
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The legal system is an expensive social institution, raising the question of whether the amount of litigation is socially appropriate. The thesis developed here is that it is notbecause of fundamental differences between private and social incentives to use the legal system. These differences permeate litigation, affecting decisions about the bringing of suits, settlement versus trial, and trial expenditures. The privatesocial divergence is attributable to two externalities: when a party makes a litigation decision, he does not take into account the legal costs that he induces others to incur (a negative externality), nor does he recognize associated effects on deterrence and certain other social benefits (a positive externality). Consequently, the privately determined level of litigation can either be socially excessive or inadequate and may call for corrective social policies. A variety of policies are discussed, including taxation versus subsidy of suit, feeshifting, and promotion versus discouragement of settlement.
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A central conclusion of the economic analysis of corporate liability is that the level of liability should generally equal harm. However, this result does not necessarily hold when the ability of corporations to impose penalties on employees for causing harm is limited (usually at most dismissal from their jobs), implying that employees' motives to prevent harm may be inadequate. Firms can partially remedy this problem by paying employees an above-market wage, because that will raise employees' desire to keep their jobs. But a firm's incentive to pay such a supernormal wage deviates from the socially desirable incentive to pay supernormal wages. This leads to the result that optimal level of liability can be either above or below harm.
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We say that a person's act caused harm if the harm would not have occurred had the person not committed the act. This meaning of causation (sometimes called causation in fact or "but for" causation) along with notions of "proximate causation" are considered in this encyclopedia entry. It is a basic characteristic of tort law that liability is not imposed unless the defendant caused harm in a relevant sense. The chief question addressed here is how this feature of tort law advances the social, instrumental ends of the legal system.
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This article uses a two-period version of the standard economic model of deterrence to study whether sanctions should depend on an individual's record of prior convictions -- his offense history. The principal contribution of the article is to demonstrate that it may be optimal to treat repeat offenders disadvantageously because such a policy serves to enhance deterrence: When an individual contemplates committing an offense in the first period, he will realize that if he is caught, not only will he bear an immediate sanction, but also -- because he will have a record -- any sanction that he bears in the second period will be higher than it would be otherwise.
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A basic question about litigation concerns the frequency of plaintiff victory at trial and how cases that go to trial relate to settled cases. In a stimulating paper, Priest and Klein advanced a model in which there is a tendency for plaintiffs to prevail at trial with probability 50 percent. However, this note demonstrates that, in a simple, frequently employed model of litigation, it is possible for the cases that go to trial to result in plaintiff victory with any probability. Moreover, given any probability of plaintiff victory at trial, the probability of plaintiff victory among settled cases (had they been tried) may be any other probability. Further, data on the frequency of plaintiff victory does not clearly support the 50 percent tendency. In consequence, this note concludes that it does not seem appropriate to regard 50 percent plaintiff victories as a central tendency, either in theory or in fact.
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Assessment of damages is a principal issue in litigation and, in light of this, we consider the social justification for, and the private benefits of, accurate measurement of harm. Greater accuracy induces injurers to exercise levels of precaution that better reflect the magnitude of the harm they are likely to generate, and, relatedly, it stimulates uninformed injurers to learn about risks before acting. However, accuracy in assessment of harm cannot influence the behavior of injurers--and is therefore of no social value--to the degree that they lack knowledge of the harm they might cause when deciding on their precautions. Regardless of the social value of accuracy, litigants generally gain by devoting resources toward proof of damages, leading often to socially excessive private incentives to establish damages.
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In his interesting comment on my recent article, “The Appeals Process as a Means of Error Correction,” Edward Schwartz makes two criticisms of my analysis. The criticisms have essentially to do with my assumption that an appeals court judge will base his or her decisions only on what happened at trial, and not on any inference that can be drawn from the fact that an appeal was brought. Before explaining why I do not find Schwartz's criticisms problematic, it will be helpful for me to restate the main features of the model that I examined in the article.
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Should property rights be protected absolutely -- by property rules -- or instead by the requirement that infringing parties pay for harm done--that is, by liability rules? In this article, we present a systematic economic analysis of this fundamental question. Our primary object is to explain why liability rules are often employed to protect individuals against harmful externalities (such as pollution and automobile accidents), whereas property rules are generally relied upon to protect individuals from having their possessions taken from them, thereby ensuring a basic incident of ownership. In the course of our analysis, we suggest that a variety of commonly held beliefs about property and liability rules are in error, and we also derive results bearing on legal policy. Notably, we show that, for controlling some important externalities, liability rules (and pollution taxes) are superior to property rules (including many forms of regulation) even when damages must be set using only limited information about harm.
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Arguments that liability rules are preferable to property rules when bargaining is imperfect are flawed because of the uncertain influence of information-forcing on the bargaining process. Examples advanced in support of the preferability of liability rules are based on examples that appear to support the opposite conclusion that property rules will result in better outcomes. Imperfect bargaining is likely to do better under a liability scheme because bargaining may fail and if it fails liability rules are preferable.
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The appeals process--whereby a litigant disappointed with the decision of a first-order tribunal can seek reconsideration before a higher tribunal--is a widely observed feature of adjudication. What rationale can be offered for incorporation of an appeals process in a system of adjudication? The justification analyzed here concerns error correction: the appeals process allows society to harness information that litigants have about erroneous decisions and thereby to reduce the incidence of mistake at low cost (because the appeals tribunal convenes only in a subset of cases). This argument explains why the appeals process may be superior to the alternative of enhancing the quality of the trial process. The argument also explains why disappointed litigants are given the right to instigate appeals (instead of the higher tribunal having the right to reconsider trial outcomes). The article also discusses other justifications for the appeals process, including lawmaking.
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When parties need to resolve disputes, they may often turn not only to trial before courts but also to alternative methods of dispute resolution (ADR), such as arbitration. This article examines why parties make use of ADR and what the social interest is in ADR. A basic distinction is drawn between ex ante ADR arrangements (made before disputes arise) and ex post ADR agreements (made after disputes arise). The private advantages of ex ante ADR agreements are identified. Because such agreements raise parties' well-being, the agreements should ordinarily be legally enforced. But there is no general call for ex ante ADR to be aided by the state. Ex post ADR agreements are somewhat different, in part because parties do not take into account how such agreements will affect their prior behavior. Hence, the agreements do not necessarily advance parties' welfare and, as with ex ante ADR, there is no general basis for public support of ex post ADR.
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Should the level of liability imposed on an injurer be based on the harm he caused or instead on the gain he obtained from engaging in the harmful act? The main point of this article is that there is a strong reason to favor liability based on harm rather than gain when account is taken of the possibility of legal error. Notably, even a small underestimate of gain can lead an injurer to commit a harmful act when the harm greatly exceeds his gain, causing a large social loss. In contrast, a comparable error in the estimate of harm will not lead an injurer to engage in the harmful act when the harm significantly exceeds his gain. The general superiority of harm-based liability is shown to hold under the rules of negligence and strict liability and regardless of whether potential injurers know the error that will be made.
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Self-reporting--the reporting by parties of their own behavior to an enforcement authority--is a commonly observed aspect of law enforcement, such as in the context of environmental and safety regulation. We add self-reporting to the model of the control of harmful externalities through probabilistic law enforcement, and we characterize the optimal scheme. Self-reporting offers two advantages over schemes without self-reporting: enforcement resources are saved because individuals who report their harmful acts need not be detected, and risk is reduced because individuals who report their behavior bear certain rather than uncertain sanctions.
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Louis Kaplow & Steven Shavell, Accuracy in the Determination of Liability, 37 J.L. & Econ. 1 (1994).
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Many legal rules, notably rules of procedure and evidence, are concerned with achieving accuracy in the outcome of adjudication. In this article, we study accuracy in the conventional model of law enforcement. We consider why reducing error in determining liability is socially valuable and how error and its reduction affect the optimal probability and magnitude of sanctions.
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Steven Shavell, Acquisition and Disclosure of Information Prior to Sale, 25 RAND J. Econ. 20 (1994).
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This article analyzes incentives to acquire information about the value of things before sales transactions, and voluntary versus required disclosure of such information. Two distinctions are emphasized: whether information is mere foreknowledge or instead can raise value-has social value; and whether it is sellers or buyers who decide to acquire information. The main conclusions in the model are that voluntary disclosure results in socially excessive incentives to acquire information; mandatory disclosure is socially desirable for sellers; but for buyers, the freedom to keep silent may be needed to spur acquisition of socially desirable information.
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Should legal rules be chosen only on the basis of their efficiency or also on the basis of their distributional effects? This article demonstrates that redistribution accomplished through legal rules is systematically less efficient than redistribution accomplished through the income tax system -- even though the latter distorts incentives to work. In particular. a regime with an inefficient legal rule can be replaced by a regime with an efficient legal rule and a modified income tax system designed so that every person is made better off.
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It is appropriate to criminalize blackmail because blackmail, like robbery, punishes those who place an individual in a compromising situation and threaten to make that situation worse unless money is exchanged. Punishing blackmail benefits society because it allows individuals to express themselves and act freely without fear of having to pay to keep lawful yet embarrassing information secret.
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Methods of law enforcement, including safety regulation, tort action, criminal enforcement, injunction and corrective taxation, can be categorized by type of sanction, the stage in time where action is taken and who takes enforcement action. This categorical analysis of society's options to deter harmful behavior can help to determine what would be the optimal procedure for addressing various harms. Indeed, the variety of methods of enforcement shows a degree of understanding that different harms have different optimal means of deterrence.
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This article considers situations in which plaintiffs seek nonmonetary judgments, for instance, custody of a child or an injunction. The primary questions of interest concern when parties will be likely to settle and, if so, what the nature of their settlements will be. The answers to these questions are different from what they are when plaintiffs seek purely monetary awards. In that case settlements involve only money payments whereas here they involve as well disposition of the nonmonetary things sought (who obtains custody of a child). Also, as is well known, when plaintiffs seek monetary judgments the parties will be inclined to settle to save litigation costs and reduce risk if they agree about the likelihood of plaintiff success at trial, but here that is not necessarily true. (For example, custody of a child may well be considered vital by each parent, making each unwilling to relinquish the chance of securing custody through trial for any amount in the range of what the other could pay.)
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This article studies how liability for environmentally harmful discharges affects the incentives of firms to engage in cleanup and invest in precautions, as well as the incentives of consumers to purchase the goods whose production leads to discharges. Our main conclusion is that making firms responsible for cleanup and strictly liable for any remaining harm will lead to the socially optimal outcome. We also show that under the negligence approach -- whereby a firm is liable for damages only if it fails to take appropriate precautions or to engage in proper cleanup -- the outcome will not be optimal: too much of the good will be purchased.
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Some of the costs of enforcing laws are fixed" - - in the sense that they do not depend on the number of individuals who commit harmful acts- -while other costs are "variable"- - they rise with the number of such individuals. This article analyzes the effects of fixed and variable enforcement costs on the optimal fine and the optimal probability of detection. It is shown that the optimal fine rises to reflect variable enforcement costs; that the optimal fine is not directly affected by fixed enforcement costs; and that the optimal probability depends on both types of enforcement costs.
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This article considers whether the demand for legal advice about potential liability for future acts is socially excessive. using the standard model of accidents, we find that the answer depends on the type of advice and the form of liability. When advice provides information about properly determined liability, the demand for advice is socially optimal under strict liability but is socially excessive under the negligence rule. When advice identifies errors the legal system is expected to make, the demand for advice is socially excessive under both liability rules.
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The problem of optimal public enforcement of law is examined in a model in which two types of enforcement effort are distinguished: specific enforcement effort, activity devoted to apprehending and penalizing individuals who have committed a single type of harmful act; and general enforcement effort, activity affecting the likelihood of apprehension of individuals who have committed any of a range of harmful acts. (A policeman on the beat, for instance, is able to apprehend many types of violators of law.) If all enforcement effort is specific, then under wide assumptions it is optimal for sanctions to be extreme for all acts. However, if all enforcement effort is general, optimal sanctions are low for acts of small harmfulness, increase with the degree of harmfulness, and reach the extreme only for the most harmful acts (the main result of the paper). Also considered is the assumption that enforcement effort may be both general and specific.
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A model is examined in which individuals take precautions that reduce the amount stolen if thieves enter their homes; and the amount of theft is influenced by the level of individuals' precautions. It is emphasized that the motive of individuals acting alone to take precautions may include the diversion of theft to others but does not take into account general deterrence. For this and other reasons, the level of precautions exercised by individuals acting alone may differ from their collectively optimal level and also from the socially optimal level (which reflects effort devoted to theft).
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According to the contract law principle established in the famous nineteenth century English case of Hadley v. Baxendale, and followed ever since in the common law world, liability for a breach of contract is limited to losses "arising ... according to the usual course of things," or that may be reasonably supposed "to have been in the contemplation of both parties, at the time they made the contract, ..." Using a formal model, we attempt in this paper to analyze systematically the effects and the efficiency of this limitation on contract damages. We study two alternative rules: the limited liability rule of Hadley, and an unlimited liability rule. Our analysis focuses on the effects of the alternative rules on two types of decisions: buyers' decisions about communicating their valuations of performance to sellers; and sellers' decisions about their level of precautions to reduce the likelihood of nonperformance. We identify the efficient behavior of buyers and sellers. We then compare this efficient behavior with the decisions that buyers and sellers in fact make under the limited and unlimited liability rules. This analysis enables us to provide a full characterization of the conditions under which each of the rules induces, or fails to induce, efficient behavior, as well as the conditions under which each of the rules is superior to the other.
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An important result in the economic theory of enforcement is that, under certain circumstances, it is optimal for a fine to be as high as possible - to equal the entire wealth of individuals. Such a fine allows the probability of detection to be as low as possible, thereby saving enforcement costs. This note shows that when the level of wealth varies among individuals, the optimal fine generally is less than the wealth of the highest wealth individuals, and may well be less than the wealth of most individuals.
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The purpose of this article is to provide a theory of the deferred giving of gifts by altruistic donors.' In particular, I address the following questions. First, why do altruistic donors frequently wish to defer giving gifts? (If they wish to give gifts, why do they not do so immediately?) Second, presuming that they wish to defer giving gifts, why do altruistic donors often announce their intentions to donees in advance? Third, why do such donors sometimes desire to be legally bound to give gifts? Fourth, what are the effects of a legal rule that renders donors bound to give gifts if they state their intentions and donees rely on their statements? In Section I, I consider these questions using a model of donor and donee behavior that I analyze formally in Section II. In Section III, I offer several concluding observation
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Much legal advice is provided after individuals have committed acts -- when they come before a tribunal -- rather than at the time they decide how to act. This paper considers the effects and social desirability of such legal advice. It is emphasized that legal advice tends to reduce expected sanctions, which may encourage acts subject to sanctions. There is, however, no a priort basis for believing that this is socially undesirable, because, among other reasons, it may be possible to raise the level of sanctions to offset their dilution due to legal advice. In addition, legal advice has no general tendency to improve the effectiveness of the legal system through its influence on the information presented to tribunals.
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Punishment of criminal attempts increases deterrence: both attempts that result & those that do not result in harm have to be sanctioned in order to demonstrate that the expected sanction exceeds the benefit (presented as a probability-discounted model of expected sanction). If full information on the criminal act is available to the courts, then the potential harm is calculated, & the imposed sanction can be equal to the sanction for causing harm. If the knowledge about the act is imperfect, the court should follow the same basic procedure, & obtain information about the probability that an attempt would have been successful. Several deterrence rationales justifying the punishment of an attempt are described, & incentives to alter criminal conduct while commiting an attempt are discussed.
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The theory of deterrence has been concerned primarily with situations in which individuals consider whether to commit a single harmful act (whether to discharge a pollutant into a lake, whether to steal a car) rather than with situations in which individuals decide which of several harmful acts to commit (whether to discharge one pollutant or another pollutant into a lake, whether to engage in car theft or in burglary). In the latter situations, the threat of sanctions plays a role in addition to the usual one of deterring individuals from committing harmful acts: it influences which harmful acts undeterred individuals choose to commit (it accomplishes "marginal deterrence"). It is shown in the present note that sanctions may increase more with harm when individuals choose among harmful acts than when individuals choose only whether to commit single harmful acts. The reason is that a higher gradation of sanctions encourages the undeterred to commit less harmful acts. The assumption necessary for this conclusion is that probabilities of apprehension for different acts are equal, being determined by a general level of enforcement effort. If enforcement effort is specific to the act, the conclusion does not hold; optimal sanctions for different acts are then equal to each other.
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Parties in a legal dispute often communicate and share information before reaching a settlement, or failing that, proceeding to trial. The voluntary sharing of information prior to settlement negotiations is examined in a model, where one type of litigant (plaintiffs) possesses private information. The information pertains to the expected judgment the plaintiff would obtain from the trial. In equilibrium, plaintiffs whose predicted judgments would exceed a predicted threshold will disclose their information (if it can be substantial) and will settle for amounts greater than if they were to remain silent. Plaintiffs whose predicted judgments are lower will remain silent and will settle. The impact of the legal right of "discovery" also is studied. The principal conclusion (that some parties will choose not to reveal their information and, if all can voluntarily reveal their information, there will be no inefficient failures to agree) carries over to models of asymmetry of information in other fields, such as the price of goods offered for sale.
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Legal advice provided in the course of litigation often concerns the selection of information to present to a tribunal. Professors Kaplow and Shavell examine the effects and social desirability of this kind of advice. They observe that such advice may result in either more or less information reaching the tribunal and that, in either case, it will tend to produce more favorable outcomes for clients. Because individuals will take this effect into account when deciding how to act, the prospect of advice may alter their behavior. The authors explore the factors determining whether the influence on behavior is desirable or detrimental. They emphasize that legal advice supplied during litigation differs significantly from advice given when acts are initially contemplated, because only the latter type of advice generally tends to channel behavior in a socially desirable manner. The authors' analysis raises basic questions about the wisdom of the attorney-client privilege and rules protecting confidentiality in the context of litigation, and it suggests that inquiry into the lawyer's role be recast.
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A theoretical model of deterrence is studied in which the imposition of nonmonetary (as opposed to monetary) sanctions is socially costly. It is therefore desirable that the system of sanctions be designed so that sanctions are imposed infrequently. If courts possess perfect information, the optimal system is such that sanctions are never imposed--all who can be deterred will be--but, realistically, courts' information will be imperfect and sanctions will be imposed.
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Accident law, if properly designed, is capable of reducing the incidence of mishaps by making people act more cautiously. Scholarly writing on this branch of law traditionally has been concerned with examining the law for consistency with felt notions of right and duty. Since the 1960s, however, a group of legal scholars and economists have focused on identifying the effects of accident law on people's behavior. Steven Shavell's book is the definitive synthesis of research to date in this new field.