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
Date Written: December 1997
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: Suggested Citation