Filtering Tort Accidents

Abstract

Conventional wisdom in the economic analysis of tort law holds that legal errors distort incentives, causing behavior to depart from the optimum. If potential injurers know that courts err, they may engage in less or more than optimal precaution. By contrast, when courts always set the care standard at the socially efficient levels, injurers are incentivized to take due care. This article revisits the effect of judicial error on the incentives of potential injurers by identifying a heretofore-neglected filtering effect of uncertainty in settings of imperfect judicial decision-making. We show that when courts make errors in the application of the liability standards, legal uncertainty filters out the most harmful torts but leaves unaffected less harmful accidents. Our insight applies to various procedural and institutional aspects of legal adjudication, including the randomization of case assignment, the strength of precedent, and the use of standards versus rules.

Keywords: tort law, deterrence, filtering

JEL Classification: K22