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Economic Analysis of Punitive Damages: Theory, Empirics, and Doctrine

RESEARCH HANDBOOK ON THE ECONOMICS OF TORTS, Jennifer Arlen, ed., Edward Elgar, Forthcoming

NYU Law and Economics Research Paper No. 12-02

26 Pages Posted: 23 Jan 2012 Last revised: 12 Sep 2013

Catherine M. Sharkey

New York University School of Law

Date Written: December 15, 2011

Abstract

This chapter — to be included in Research Handbook on the Economics of Torts (Arlen ed., Kluwer, forthcoming 2012) — assesses economic rationales for punitive damages in light of contemporary empirics and doctrine. The primary economic rationale for supra-compensatory damages is optimal deterrence (or loss internalization): when compensatory damages alone will not induce an actor to take cost-justified safety precautions, then supra-compensatory damages are necessary to force the actor to internalize the full scope of the harms caused by his actions. Alternative economic rationales — disgorgement of ill-gotten gains and enforcement of property rights — have been proposed to align the theory with the historical and conventional focus of punitive damages on intentionally wrongful behavior.

Notwithstanding its academic prominence, the economic deterrence rationale has not dominated doctrine. In fact, the U.S. Supreme Court has all but rejected economic deterrence, by instead placing increasing emphasis on a competing retributive punishment rationale. But, since punitive damages lie squarely within the purview of state law, state legislatures and courts possess a degree of freedom to articulate state-based goals of punitive damages — such as economic deterrence — even in the face of heavy-handed federal constitutional review imposed by the U.S. Supreme Court.

Keywords: punitive damages, deterrence, optimal deterrence

JEL Classification: K13, K41

Suggested Citation

Sharkey, Catherine M., Economic Analysis of Punitive Damages: Theory, Empirics, and Doctrine (December 15, 2011). RESEARCH HANDBOOK ON THE ECONOMICS OF TORTS, Jennifer Arlen, ed., Edward Elgar, Forthcoming; NYU Law and Economics Research Paper No. 12-02. Available at SSRN: https://ssrn.com/abstract=1990336

Catherine M. Sharkey (Contact Author)

New York University School of Law ( email )

40 Washington Square South
New York, NY 10012-1099
United States
212-998-6729 (Phone)

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