Econ 522
Economics of Law
Dan Quint
Fall 2009
Lecture 16
Logistics
 HW2 due now
 Midterm Thursday
1
Last Thursday…
 Tort law

Harm, causation, breach of duty
 Strict liability rule

No need to prove negligence (breach of duty), just harm and
causation
 Versus negligence rule

Need to prove all three elements
 Today: economic model of torts
2
Precaution
3
Precaution
 The more carefully I drive, the less likely I am to hit you



Duh
But, driving more carefully is also more costly to me
Must be some efficient level of care
4
Precaution
 The more carefully I drive, the less likely I am to hit you



Duh
But, driving more carefully is also more costly to me
Must be some efficient level of care
 What determines how carefully I drive is what I think will
happen if I hit you


Tort law creates incentives
The essence of tort law is to use liability to get injurers to
internalize the externalities their actions cause
5
Model of unilateral harm
x
w
p(x)
A
level of precaution
marginal cost of precaution
probability of an accident
cost of an accident
 Unilateral harm – only one victim
 Precaution – costly actions that make accident less likely


Could be taken by either victim or injurer
We’ll focus on one at a time
 Notation


x – the level of precaution that is taken
w – the cost of each “unit” of precaution


p(x) – probability of an accident, given precaution x


so total cost of precaution is wx
p is decreasing in x
A – cost of accident (to victim)

so expected cost of accidents is p(x) A
6
Model of unilateral harm
x
w
p(x)
A
level of precaution
marginal cost of precaution
probability of an accident
cost of an accident
$
wx + p(x) A
(Total Social Cost)
wx (Cost of Precaution)
p(x) A (Cost of Accidents)
x* (Efficient Level
of Precaution)
Precaution (x)
7
x
w
p(x)
A
Model of unilateral harm
efficient precaution:
minx { wx + p(x) A }
w + p’(x) A
marginal social cost
of precaution
w
level of precaution
marginal cost of precaution
probability of an accident
cost of an accident
=
=
0
– p’(x) A
marginal social
benefit of precaution
 Under reasonable assumptions (p(x) convex)…



x < x*

w < – p’(x) A
 MSB of precaution greater than MSC  more precaution efficient
x > x*

w > – p’(x) A
 MSC of precaution greater than MSB  less precaution efficient
x = x*

MSB = MSC
8
Model of unilateral harm
x
w
p(x)
A
level of precaution
marginal cost of precaution
probability of an accident
cost of an accident
$
wx + p(x) A
wx
p(x) A
x < x*
x* x > x*
x
9
Model of unilateral harm
 We haven’t yet said who is taking precaution

Some cases, only injurer can reduce accidents

Some cases, victim can too

Model works fine for either one (unilateral precaution)

Under most conditions, works fine when both parties take precaution
(bilateral precaution)
 Next: consider effect of different liability rules on precaution
10
Effect of liability rules on precaution
 No liability
 Strict liability
 Negligence
11
Rule 1: No Liability
 Victim precaution



Private cost to victim: wx + p(x) A
Victim sets w = – p’(x) A
Rule of no liability leads to efficient level of victim precaution
 Injurer precaution



Private cost to injurer: wx
Injurer sets x = 0
Rule of no liability leads to inefficiently low level of injurer
precaution
12
Effect of liability rules on precaution
No Liability
Victim
precaution
Injurer
precaution
Efficient
Zero
13
Rule 2: Strict Liability
 Perfect compensation: damages D = A
 Victim precaution




Private cost to victim: wx + p(x) (A – D) = wx
Victim sets x = 0
Social cost is wx + p(x) A, efficient level satisfies w = – p’(x) A
Strict liability leads to inefficiently low level of victim precaution
 Injurer precaution



Private cost to injurer: wx + p(x) D = wx + p(x) A
Injurer sets x efficiently
Strict liability leads to efficient level of injurer precaution
14
Effect of liability rules on precaution
No Liability
Strict Liability
Victim
precaution
Injurer
precaution
Efficient
Zero
Zero
Efficient
15
So for accidents with unilateral precaution…
 When it is the injurer who can take precautions, a rule of
strict liability is more efficient
 When it is the victim who can take precautions, a rule of
no liability is more efficient
 Each rule works well for one incentive, poorly for other


Similar to paradox of compensation we already saw
What about bilateral precaution?
 Negligence rule may allow us to get both incentives right
16
Rule 3: Negligence
 Legal standard of care xn
 Injurer is liable for damages if precaution level was below
the legal standard of care


x < xn  D = A
x  xn  D = 0
 So on our graph from before, private cost to injurer is…


wx + p(x) A
wx
for x < xn
for x  xn
17
Injurer precaution under a
negligence rule
$
x
w
p(x)
A
level of precaution
marginal cost of precaution
probability of an accident
cost of an accident
Private cost to injurer
wx + p(x) A
wx
p(x) A
xn = x*
x
 If legal standard of care is set to efficient level (xn = x*),
negligence rule leads to efficient injurer precaution
18
Effect of liability rules on precaution
No Liability
Strict Liability
Negligence,
with xn = x*
Victim
precaution
Injurer
precaution
Efficient
Zero
Zero
Efficient
Efficient
Efficient
19
For bilateral precaution, different ways to
implement a negligence rule
 Rule we just saw: injurer is liable if he was negligent, not
liable if he was not
 But we can consider both whether injurer was negligent…
 …and whether victim was negligent…
 …when determining whether injurer owes damages
(and how much)
20
For bilateral precaution, different ways to
implement a negligence rule
Does injurer owe victim damages when…
Neither party
negligent?
Only victim
negligent?
Only injurer
negligent?
Both parties
negligent?
Simple Negligence
No
No
Yes
Yes
Negligence with Defense of
Contributory Negligence
No
No
Yes
No
21
For bilateral precaution, different ways to
implement a negligence rule
Does injurer owe victim damages when…
Neither party
negligent?
Only victim
negligent?
Only injurer
negligent?
Both parties
negligent?
Simple Negligence
No
No
Yes
Yes
Negligence with Defense of
Contributory Negligence
No
No
Yes
No
Comparative Negligence
No
No
Yes
Partial
Strict Liability with Defense
of Contributory Negligence
Yes
No
Yes
No
22
Here’s the cool part…
 When standard of care (for both injurer and victim) is set
at the efficient level…
 …any of these negligence rules lead to efficient level of
precaution by both parties




Simple negligence
Negligence with a defense of contributory negligence
Comparative negligence
Strict liability with a defense of contributory negligence
23
Even in a setting with bilateral precaution…
No Liability
Strict Liability
Any negligence rule
with efficient legal
standard of care
Victim
precaution
Injurer
precaution
Efficient
Zero
Zero
Efficient
Efficient
Efficient
24
(I mentioned, with bilateral precaution,
things occasionally get more complicated…)
 Redundant precaution – either party could take
precaution, efficiency only requires one of them
 If precaution is continuous, any negligence rule still leads
to efficient precaution level by both
 When precaution is discontinuous, not always

Driver can fasten seatbelt, or car company can design seatbelt that buckles
itself (more costly)
 Simple negligence: car company might be liable if designed manual seatbelt
and driver didn’t use it, so car company might design automatic belt
 Negligence with defense of contributory negligence: car company escapes
liability, so designs manual belt, rational driver uses it
 But as long as precaution is continuous, no problem
25
So far, our results seem to favor negligence
rules… but…
No Liability
Strict Liability
Any negligence rule
with efficient legal
standard of care
Victim
precaution
Injurer
precaution
Efficient
Zero
Zero
Efficient
Efficient
Efficient
 Up next: activity levels
 Steven Shavell, “Strict Liability Versus Negligence”
26
Good luck
on Thursday!
27