Welfare Implications of Costly Litigation under Strict Liability
Keith N. Hylton
William Fairfield Warren Distinguished Professor, Boston University; Professor of Law, Boston University School of Law
American Law and Economics Review, Vol. 4, No. 1, pp. 18-43, 2002
This article examines a model of strict liability with costly litigation and presents conditions under which (1) potential injurers take optimal precautions, (2) increasing the cost of litigation enhances precaution and social welfare, (3) the optimal level of liability exceeds the compensatory level, and (4) increasing the rate of settlement enhances social welfare. The results have implications for controversies surrounding fee shifting, optimal damage awards (e.g., punitive damages), and the social desirability of settlement. The most striking implication is that fee shifting in favor of prevailing plaintiffs is socially desirable in low-transaction-cost settings.
Accepted Paper Series
Date posted: February 29, 2008
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