The Best Point: A New Compensation Criterion and Goal for Tort Law

Abstract

This article questions tort law’s common wisdom of compensating victims by awarding damages. It argues that damage awards (DA) do not meet the fundamental goals of tort law, whereas another remedy uniquely does: the injurer should be obliged to repay the victim not only her damages, but her damages plus half the additional profits derived from the taking. We name this criterion best welfare point or in short, BP.

The article presents torts as takings and justifies the BP criterion using five methods or theories. First, using neoclassical economic analysis, the article shows that in settings of tortious entitlement markets, by forcing takings at entitlement costs, the DA criterion undermines the structure and operation of free and competitive entitlements markets, which the BP criterion may restore. Second, using game theory considerations, we show that in settings of bilateral bargaining between a potential injurer and victim, and with courts’ measurement errors being systematically biased in favor of either injurers or victims, DA cannot ex-ante ensure that only efficient tortious takings would occur, something only the BP criterion may ensure. Third, using behavioral economics findings, we show that in modern manufacturing, biases in risk estimation due to cognitive mechanisms lead to underestimation of risks, and in turn to underinvestment in precautions, and explain that the BP criterion could serve as excellent debiasing mechanism. Fourth, we turn to normative theories, starting with corrective justice, to demonstrate how the BP criterion may best meet Aristotle’s and modern corrective justice theories’ notion of justice. We suggest that the BP criterion can also best explain biblical and other controversial ancient legal damage rules subsumed under the “eye for an eye” mantra. Finally, we consider distributive justice theory, and argue that BP meets Rawlsian criteria of justice as fairness.

In conclusion, we present primary implications of BP, such as the fact that it makes liability and property rules similar, and offer how to use it as a debiasing mechanism. Accordingly, we propose amendments to the current tort law, and discuss methods of determining compensation awards based on this new criterion.

Keywords: Damage Awards, New Compensation Criterion, Disgorgement, Tort Law Objectives, Torts as Takings, Liability Rules, Property Rules

JEL Classification: K00, K13, D03, D4, C7