The Principle of Marginal Deterrence in Torts: The Potentially Perverse Effects of Stiffer Tort Penalties and Higher Taxes

Olin Working Paper No. 97-18

Posted: 5 Apr 1998

See all articles by Michael S. Knoll

Michael S. Knoll

University of Pennsylvania Law School; University of Pennsylvania Wharton School -- Real Estate Department

Date Written: December 1997

Abstract

This paper demonstrates that stiffer tort penalties and higher taxes can have the perverse and counterintuitive effect of encouraging manufacturers to produce and market riskier products that they would not otherwise produce were penalties not as stiff nor taxes as high. This effect can occur in two ways, which I call "Less to Lose" and "Less to Win." With "Less to Lose," stiffer penalties encourage manufacturers to produce products that if dangerous will cause more harm. This perverse effect occurs because once penalties are high enough that the manufacturer would be bankrupt if it produced a product with the potential to cause much harm, then further stiffening penalties only increases the penalty from producing a product that would not cause as much harm. With "Less to Win," higher exactions (such as more expensive mandatory insurance) can cause manufacturers to produce products that have a higher probability of being dangerous. This counterintuitive effect occurs because higher taxes reduce the manufacturer's equity when the product is not dangerous, which is the benefit it earns if the safer product is not dangerous but the less safe one is.

JEL Classification: K13

Suggested Citation

Knoll, Michael S., The Principle of Marginal Deterrence in Torts: The Potentially Perverse Effects of Stiffer Tort Penalties and Higher Taxes (December 1997). Olin Working Paper No. 97-18. Available at SSRN: https://ssrn.com/abstract=73869

Michael S. Knoll (Contact Author)

University of Pennsylvania Law School ( email )

3501 Sansom Street
Philadelphia, PA 19104
United States
215-898-6190 (Phone)
215-573-2025 (Fax)

University of Pennsylvania Wharton School -- Real Estate Department ( email )

Philadelphia, PA 19104-6330
United States

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