Decoupling as Transactions Tax

24 Pages Posted: 31 Aug 2007 Last revised: 21 Oct 2010

Nuno M. Garoupa

Texas A&M University School of Law; Catholic University of Portugal (UCP) - Católica Global School of Law

Chris William Sanchirico

University of Pennsylvania Law School; University of Pennsylvania Wharton School - Business Economics and Public Policy Department

Date Written: September 1, 2007

Abstract

In an influential paper Polinsky and Che (1991) propose that litigation can be made a more cost effective tool for setting primary activity incentives (e.g., for product safety or promissory performance) by reducing plaintiffs' recovery while simultaneously raising defendants' damages. "Decoupling" in this manner reduces the number of filed suits, but increases the deterrent impact of each. Litigation costs fall, but, if damages are raised sufficiently, deterrence is maintained. Yet when the state takes from liable defendants more than it gives to victorious plaintiffs it effectively taxes (probabilistically and collectively) the transaction that led to the present litigation. This tax drives a wedge between the expected social and private benefits of participating in the transaction in the first place. The result is that socially beneficial transactions fail to take place. In this paper we explore the impact of this transactions-discouraging effect on the propriety of decoupling.

Keywords: decoupling, contracts, torts, private versus social surplus

Suggested Citation

Garoupa, Nuno M. and Sanchirico, Chris William, Decoupling as Transactions Tax (September 1, 2007). Journal of Legal Studies, Vol. 39, No. 2, 2010; U Illinois Law & Economics Research Paper No. LE07-029. Available at SSRN: https://ssrn.com/abstract=1010774 or http://dx.doi.org/10.2139/ssrn.1010774

Nuno M. Garoupa (Contact Author)

Texas A&M University School of Law ( email )

1515 Commerce St.
Fort Worth, TX 76102
United States

Catholic University of Portugal (UCP) - Católica Global School of Law ( email )

Lisboa
Portugal

Chris William Sanchirico

University of Pennsylvania Law School ( email )

3501 Sansom Street
Philadelphia, PA 19104
United States
215-898-4220 (Phone)

HOME PAGE: http://www.law.upenn.edu/faculty/csanchir/

University of Pennsylvania Wharton School - Business Economics and Public Policy Department

3641 Locust Walk
Philadelphia, PA 19104-6372
United States

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