Products Liability and Legal Leverage: The Perverse Effects of Stiff Penalties
University of Southern California Law Center, Working Paper Series No. 97-3
Posted: 25 Mar 1997
Date Written: December 1996
The law-and-economics literature recognizes that the deterrent effect of stiffer tort penalties exists only as long as the tortfeasor would be solvent if a judgment were rendered against it. The literature further states that increasing the penalty past the point of insolvency would have no additional deterrent effect. This paper describes an important class of cases where, once the point of insolvency is reached, the deterrent effect of stiffer tort penalties does not merely disappear, but has the counterintuitive effect of encouraging the penalized activity. When the liability is for a defective product that has already been sold, stiffer penalties can encourage a manufacturer to continue to produce the product. Because stiffer penalties reduce the manufacturer's equity if the product is dangerous and production ceases, but has no additional effect on its equity if the product is dangerous and production continues, the manufacturer risks less by continuing production when penalties are stiffer. Therefore, the manufacturer might continue production when with less stiff penalties it would discontinue production.
JEL Classification: K13
Suggested Citation: Suggested Citation