Corporate Risk Analysis: A Reckless Act?

Abstract

Balancing of risk and cost lies at the heart of standard negligence tests and policy analysis approaches to government regulation. Notwithstanding the desirability of using a benefit-cost approach to assess the merits of safety measures, in many court cases juries appear to penalize corporations for having done a risk analysis in instances in which the company decided not to make a safety improvement after the analysis indicated the improvement was unwarranted. Automobile accident cases provide the most prominent examples of such juror sanctions. This paper tests the effect of corporate risk analyses experimentally by using a sample of almost 500 juror-eligible citizens. Each individual considered an automobile accident scenario, but these scenarios differed in terms of whether the company undertook a risk analysis and in terms of the nature of the risk analysis. Somewhat surprisingly, even sound benefit-cost analyses of safety measures did not reduce the likelihood of punitive damages. If a company follows the procedures used by government agencies and uses a higher value of life in its analyses, the penalty levied on the corporation Increases. Internal use of higher value of life numbers serves as an anchor that boosts rather than reduces jury awards.