Regulating in Foresight Versus Judging Liability in Hindsight: The Case of Tobacco
Georgia Law Review, Vol. 33, Spring 1999
Posted: 7 Jan 2000
Society can regulate consumer products either through ex post liability or ex ante regulation. In theory, either system can induce manufacturers to undertake precautions that are cost-effective, and only those precautions that are cost-effective. It is therefore difficult to determine why manufacturers, or society, would prefer one system over another. In practice, however, cognitive limitations of judges and juries can create incentives to take an excess of precautions in the liability system. People tend to see past events as more predictable than they really were, a phenomenon known as the hindsight bias. The hindsight bias leads courts to find defendants who took reasonable care negligent or even reckless. Consequently, the liability system can be more expensive than a regulatory system, both to potential defendants and to society. Cognitive biases in the liability system can therefore explain why the tobacco industry expressed interest in settlements that would mimic a regulatory system. The influence of the hindsight bias also suggests that ex ante regulation is more efficient and more fair than judging ex post liability in hindsight.
JEL Classification: K13
Suggested Citation: Suggested Citation