Tort Law Cont.

Question 1

The Hand Rule

Answer 1

Party should be considered negligent whenever:

B < L x P

Cost of Precaution < Cost of an Accident x Probability of an Accident

Question 2

Two problems when applying the Hand Rule

Answer 2

(a) Courts tend to include only risk to others when calculating negligence, but it should also include risk to self.
(b) Hindsight Bias: Subjective assessment of risk is often overinflated by proximate harms

Fortunately, these two problems work in opposite directions

Question 3

Relaxing Assumptions

Answer 3

Our models often correctly predict the direction of effects in law, but poorly predict the magnitude of effects. This is partially due to the following unrealistic assumptions we’ve made about how the legal system works

Question 4

Relaxing Assumptions: Rationality

As well as it’s objections

Answer 4

Agents act to maximize their expected utility (subject to consistent risk-preferences) based on accurate assessment of risks.

Objection:

1. Risk Perception: People systematically misperceive the value of probabilistic events: overestimating exotic risks and underestimating mundane risks
2. Risk Preferences: People are willing to take small-probability gambles, but not proportional larger-probability gambles.

Question 5

Relaxing Assumptions: Full Damage Payment

As well as it’s objection

Answer 5

Damages are paid in full, and so injurers fully internalize the value of all harms.

Objection:
Agents are often liquidity-constrained and incapable of paying damages in full

Question 6

Relaxing Assumptions: No Regulations

As well as it’s objection

Answer 6

There are no regulations in place aside from liability rules

Objection:
Regulations are ubiquitous, and often function better than tort libaility (e.g. judgement proof injurers; small harms to many parties)

Question 7

Relaxing Assumptions: No Insurance

As well as it’s objection

Answer 7

Insurance cannot be purchased to protect from risks, and so involved parties bear the cost of accidents

Objection:
Insurance partially protects involved parties from the cost of accidents, but this can reduce the incentives to take precaution created by liability rules (moral hazard)

Question 8

Relaxing Assumptions: Costless Litigation

As well as it’s objection

Answer 8

There are no costs (explicit or opportunity-cost from taking claims to court.)

Objection:
Costly litigation reduces victims’ incentives to bring suits and increases expected costs to peotential injurers. Further, the rules about who bears the cost of litigation creates incentives of its own (e.g. the incentive to bring “frivoulous” suits designed to elicti out-of-court settlement

Question 9

Relaxing Assumptions: Informed Citizens

As well as it’s objection

Answer 9

Parties have perfect knowledge of the laws which affect them.

Objection:
There are numerous laws and parties are often unaware of them, and instead act in accordance with social norms

Question 10

Strict Liability vs Negligence

Answer 10

Negligence is difficult to prove relative to harm and causation, and so strict liability is increasingly common.

When court can assess damages more accurately than standard of care, strict liability is more efficient.

When court can better assess standards, negligence rules are more efficient because they lead to fewer trials.

Question 11

Mistakes in Assessing Damages: Random and Systematic

Answer 11

Random Mistakes (or uncertainty): Damages may be incorrect in specific cases, but are correct on average. These mistakes have no effect on the incentives of expected-wealth-maximizing agents.

Systematic Mistakes (or errors): Damages are skewed either too high or too low on average.

Question 12

Punitive Damages

Answer 12

When an injurer expects to face liability for only some fraction a<1 of harm caused, courts can award victims compensatory damages of D(x) plus punitive damages R to achieve efficient care.

R= ((1-a)/a)D(x)

Courts typically impose punitive damages that are less than ten times the value of compensatory damages

Question 13

Punitive Multiplier

Answer 13

(1-a)/a

Question 14

Vicarious Liability

Answer 14

One party is held liable for the harm caused by another

Question 15

Vicarious Liability: Respondenant Superior

Answer 15

Employer liable for torts of employee if employee was acting within the scope of employment. Gives employers incentive to hire and supervise more carefully. Can be implemented via either a liability or negligence rule, but neither is strictly better.

Question 16

Vicarious Liability: Joint Liability

Answer 16

Sue all injurers together

Question 17

Vicarious Liability: Several Liability

Answer 17

Sue each one seperately

Question 18

Vicarious Liability: Joint and Several Liability

Answer 18

Sue one of the injurers for the full amount.

Question 19

The Legal System: Filing Fees

Answer 19

Set lower than administrative costs (direct cost of running the legal system) and deter lawsuits that would not provide benefits (in expectation) exceeding the cost of making a claim. As we raise filing fees, we lower the sum total of administrative costs, butincrease the sum of error costs. (Indirect cost of errors arising from imperfect implementation.)

Question 20

The Legal System: Class-Action Lawsuits

Answer 20

Can provide incentives for injurers to avoid causing low-value harms, but can lead to “nuisance suits” or “blackmail settlements.”

Question 21

Regulatory Capture

Answer 21

When a regulatory body is captured by the industry it is in charge of regulating, often leading to regulations which protect entrenched interests.

Question 22

Liability Systems vs. Regulatory Systems

Answer 22

Liability systems also come with an incentive to avoid paying fines.

Under a regulatory system, the incentive to dodge fines is lower than in a liability system, since regulations impose small costs whereas liability systems impose large costs when they happen.