Decoupling Liability: Optimal Incentives for Care and Litigation

32 Pages Posted: 25 Aug 2000 Last revised: 6 Jan 2002

See all articles by A. Mitchell Polinsky

A. Mitchell Polinsky

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

Yeon-Koo Che

Columbia University

Date Written: February 1991

Abstract

A "decoupled" liability system is one in which the award to the plaintiff differs from the payment by the defendant. The optimal system of decoupling makes the defendant's payment as high as possible. Such a policy allows the award to the plaintiff to be lowered, thereby reducing the plaintiff's incentive to sue -- and hence litigation costs -- without sacrificing the defendant's incentive to exercise care. The optimal award to the plaintiff may be less than or greater than the optimal payment by the defendant. The possibility of an out-of-court settlement does not qualitatively affect these results. If the settlement can be monitored, it may be desirable to decouple it as well.

Suggested Citation

Polinsky, A. Mitchell and Che, Yeon-Koo, Decoupling Liability: Optimal Incentives for Care and Litigation (February 1991). NBER Working Paper No. w3634. Available at SSRN: https://ssrn.com/abstract=240077

A. Mitchell Polinsky (Contact Author)

Stanford Law School ( email )

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National Bureau of Economic Research (NBER)

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Yeon-Koo Che

Columbia University ( email )

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United States
212-854-8276 (Phone)

HOME PAGE: http://www.columbia.edu/~yc2271

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