The Welfare Implications of Costly Litigation in the Theory of Liability

39 Pages Posted: 28 Jan 2002 Last revised: 11 Jul 2010

See all articles by A. Mitchell Polinsky

A. Mitchell Polinsky

Stanford Law School; National Bureau of Economic Research (NBER)

Daniel L. Rubinfeld

University of California at Berkeley - School of Law; National Bureau of Economic Research (NBER); NYU Law School

Date Written: February 1986

Abstract

One of the principal results in the economic theory of liability is that, assuming litigation is costless, the rule of strict liability with compensatory damages leads the injurer to choose the socially appropriate level of care. This paper reexamines this result when litigation is costly. It is shown that strict liability with compensatory damages generally leads to a socially inappropriate level of care and to excessive litigation costs. Social welfare can be increased by adjusting compensatory damages upward or downward, with the desired direction depending on the effect of changes in the level of liability on the injurer's decision to take care and on the victim's decision to bring suit.

Suggested Citation

Polinsky, A. Mitchell and Rubinfeld, Daniel L., The Welfare Implications of Costly Litigation in the Theory of Liability (February 1986). NBER Working Paper No. w1834, Available at SSRN: https://ssrn.com/abstract=227174

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Daniel L. Rubinfeld

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