Punitive Damages and the Economic Theory of Penalties

Abstract:     
Should punitive damages aim to deter up to the appropriate level by internalizing costs, or should they aim to eliminate the offender's expectation of gain? This article offers a framework for answering this question and for resolving more practical issues, such as the factors that should be taken into account and the algorithm that should be used in determining a punitive award. The rule I propose is as follows: If the offender's gain is probably greater than the victim's loss, then the punitive award should aim to internalize victim losses; if the offender's gain is probably less than or equal to the victim's loss, then the punitive award should aim to eliminate the prospect of gain on the part of the offender. In most punitive damages cases, the offender's gain is probably less than or equal to the victim's loss. For these cases the appropriate algorithm requires the court to divide the defendant's gain by the probability of liability, thereby setting a minimum for the punitive award.

Note: This is a description of the paper and not the actual abstract.

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