Relaxing the Model’s Assumptions
Assumption
Rationality
Injurers are solvent and pay
full damages
No Insurance
No social policies designed to
reduce external costs
Litigation costs are zero
Reality
Effect
Systematic
behavioral errors
Wrong # of
accidents
Bankruptcy
places limit on
damages paid
Too many
accidents
Insurance (with
deductible/copay)
Moral
hazard?
OSHA, FDA,
CPSC, EPA
?
Costs > 0
for both sides
?
Other Extensions of the Model
Vicarious Liability
 Being held responsible for harm caused by
others
 Employer for the employee
 Parent for the child
 Bartender for the drinker
“acting within the scope of employment”
Joint and Several Liability
 Multiple injurers can be held liable for full
damages
Makes it easier for victim to sue and collect full
damages (deep pockets)
Other Extensions of the Model
Computing Compensatory Damages
 Indifference Approach
 Injury + damages = no injury
 Hand Rule Approach
 How much are you WTP to avoid death?
 Hand Rule: B = pL
Joe works a job where he might be exposed to a chemical that
increases the probability of death from .01 to .02 in 20 years.
Joe would pay $15,000 to avoid this risk (or accept $15,000 to
take on the risk). Joe is accidently exposed and dies after 20
years. What are Hand Rule damages for Joe’s heirs?
Implied Value of a Statistical Life from Recent
Labor Market Studies
Study
Moore and Viscusi (1990)
VSL in 2000 ($ millions)
20.8
Kniesner and Leeth (1991)
0.7
Gegax, Gerking, and Schulze (1991)
2.1
Leigh (1991)
7.1 – 15.3
Berger and Gabriel (1991)
8.6 - 10.9
Leigh (1995)
8.1 – 16.8
Dorman and Hagstrom (1998)
8.7 – 20.3
Lott and Manning (2000)
Source: Table 7.2, p. 145, Field and Field (2006)
1.5 – 3.0
Other Extensions of the Model
Computing Compensatory Damages
 Indifference Approach
 Injury + damages = no injury
 Hand Rule Approach
 How much are you WTP to avoid death?
 Hand Rule: B = pL
 Lost Income
Wrongful Death Economic Damages Report
Decedent: John Doe
Report Produced on 05/10/2000
Case Information
Trial Date: 05/30/2000
Date Damages Began: 11/18/1996
Compound Interest Rate: 0.0666 (for Past Damages)
Discount Rate: 0.0666 (for Future Damages)
Decedent Information
Sex: Male
Race: White
Birth Date: 05/31/1948
Age at Death: 48
Retirement Age: 65
Expected Age at Death: 77
Employment: Fenton Art Glass
Dependent: Mary Doe (d.o.b. 06/22/93)
Damages Summary
Present Values
Type of Damage
Pre-Trial (Past)
Post-Trial (Future)
Lost Earnings
$ 90,630.62
$ 199,462.28
Lost Fringe Benefits
$ 26,279.65
$ 58,841.37
Lost Household Services
$ 12,078.93
$ 29,069.77
Other Damages
$ 18,275.61
Total Damages
$ 147,264.81
Grand Total Damages
$ 287,373.42
$ 434,638.23
Other Extensions of the Model
 Punitive Damages
 For behavior that is “malicious, oppressive, gross, willful
and wanton, or fraudulent”
 Should bear a “reasonable relationship” to compensatory
damages
Liebeck v McDonalds (1994)
 Drive-through coffee; parked to add cream, coffee spilled on lap
for 90 seconds
 3rd degree burns (8 days in hospital, skin grafts, 2 yrs of treatment)
 Initially sought $20,000 damages (to cover $11,000 in medical
costs); McDonalds offered $800. Went to court.
 Trial
 McDonalds serves coffee at 180°-190° F
 Liebeck showed that 180° coffee can cause 3rd degree burns in 12-15
seconds (lowering the temp. would allow victims more time to react)
 McDonalds received 700 prior complaints of burns (and settled with
some victims)
 McDonalds quality control manager testified the frequency of injuries
was not sufficient to cause McDonalds to alter practices
 Jury used comparative negligence and found McDonalds 80% liable.
Compensatory damages set at $200,000, which they reduced to
$160,000. Punitive damages set at $2.9 million.
 Judge reduced punitive damages to 3x compensatory, making total
award $640,000.
 During appeal, parties settled out of court.
Other Extensions of the Model
 Punitive Damages
 For behavior that is “malicious, oppressive, gross, willful
and wanton, or fraudulent”
 Should bear a “reasonable relationship” to compensatory
damages
 Optimal punitive award depends on enforcement error
 L = Ae
where e = enforcement error = fraction of victims that sue
 Guidant is a medical equipment manufacturer. Suppose that
Guidant is sued by Mr. Jones for $50,000 for damages
associated with a pacemaker. Suppose also that Guidant has
made $500 worth of profits on each pacemaker sold, it has
sold 10,000 pacemakers, and that 6 other people have been
damaged by Guidant’s pacemakers. Because the reward is so
small, none of the other people have sued. In this case, how
should punitive damages be set to compensate for an
enforcement error?
 A = ($50,000)(7) = $350,000
 e = 1/7
 L = Ae = ($350,000)(1/7) = $50,000
 L* = Aem = ($50,000)m = $350,000
 Implies that m = 1/e = 7
m = punitive multiple
Empirical Assessment of Tort Law
Case Type
Total
Percent
Total
5,929,537
100%
Domestic Relations
2,448,150
41
Small Claims
732,977
12
Contracts
639,783
11
Estates
606,722
10
Torts
572,041
10
Real Property rights
439,947
7
Civil appeals
93,339
2
Mental Health
90,608
2
305,970
5
Other
States include: AK, AZ, CA, CO, CT, FL, HI, ID, IN, KS, ME, MD, MA, MI, MN, MO,
NV, NJ, NM, NY, ND, OH, OR, TN, TX, UT, WA, WI, WY.
Source: Court Statistics Project, National Center for State Courts, 1995.
Empirical Assessment of Tort Law
 Other findings:




Majority were auto torts
75% of cases were settled out of court; 3% decided at trial
30% were uncontested
50% disposed within 14 months
Percent of trial verdicts in favor of plaintiffs or defendants
Winner
All Cases
Auto
Medical
Malpractice
Premises
Plaintiff
53%
60%
26%
52%
Defendant
45
36
74
47
2
5
0
1
9,553
4,162
1,148
2,212
Mixed
Number of cases
Source: Court Statistics Project, National Center for State Courts, 1995.
“Data Watch: Tort-uring the Data,” with Jonathan Klick and Alex Tabarrok,
Journal of Economic Perspectives. 19(2):207-220, 2005.
Highway Fatality Rates
Fatality rates per 100 million vehicle miles
5
4.5
4
Fatality Rates
3.5
3
Rural
2.5
2
1.5
Urban
1
0.5
0
1975
1980
1985
1990
http://www.bts.gov/publications/national_transportation_statistics/
1995
2000
2005
2010
Contract Law Questions
Using an “economic theory of contract” we would
enforce:
a)
b)
c)
d)
All the contract that the classical
bargain theory enforces.
Those contracts that make both
parties better off at the time that the
agreement is reached.
All contracts by using specific
performance.
All contracts that include elements of
offer, acceptance, and consideration.
0%
a)
0%
0%
b)
c)
0%
d)
The case Hadley v Baxendale (1854) is famous for its
illustration of:
a)
b)
c)
d)
The doctrine of forseeability
The Coase Theorem.
Perfect expectation damages
Mutual mistake
0%
a)
0%
0%
0%
b)
c)
d)
Society wants the promisor to breach when:
a)
b)
c)
d)
The promisor’s cost of performing >
promisee’s benefit from performance
The promisor’s cost of performing <
promisee’s benefit from performance.
The promisor’s cost of performing >
promisor’s liability from breaching
The promisor’s cost of performing <
promisor’s liability from breaching
0%
a)
0%
0%
b)
c)
0%
d)
Let A contract to buy a custom made machine from B for $100 to be paid
upon delivery. Delivery is expected in three months. A expects to earn $20
in profits after deducting the contract price and reliance of $10 and B
expects to earn $10 in profits after deducting its expected costs. A’s
reliance expenditures, however, turn out to be $40 not $10. According to
the efficient breach/performance decision, the following statement can be
made.
a)
b)
c)
d)
A should breach if B’s costs are greater than
$100 so that it is also a losing contract for B
Since this is a losing contract for A, it may be
efficient for A but not B to breach
It is efficient for B to breach if its costs are
greater than A’s negative lost profits plus the
contract price of $100
No general statement can be made about the
efficient breach decision because the parties
should not have entered a losing contract in the
first place
0%
0%
0%
a)
b)
c)
0%
d)
Bob has been on the market for rare “alternative medicine” books for quite a
while. After expending considerable time and money in finding such a book,
he has agreed to purchase a unique volume on aromatherapy from Dan for
$10,000. After agreeing to the contract, Dan decides to renege and not deliver
the volume to Bob. He offers to give Bob his money back and call it a day. As a
consultant on this case interested in economic efficiency, you would
recommend that:
a)
b)
Bob be given the volume.
Dan retain the volume and give Bob his
money back. Bob can then purchase
another book
c)
Dan retain the volume and give Bob his
money back plus perfect expectation
damages
d)
The Coase Theorem be called into action
and that the book be given to either party,
since the courts cannot ever improve on
social welfare
0%
0%
0%
0%
a)
b)
c)
d)
Calabresi and Melamed suggest that when the costs
of writing and enforcing a contract are high
a)
b)
c)
d)
Courts should award perfect expectation
damages in order to reduce court costs
Courts should award specific performance
and let the two parties bargain
Courts should award perfect expectation
damages to reduce the transaction costs
of multiple transfers of the good
The Coase Theorem suggests that the
legal rule will not matter
0%
a)
0%
0%
b)
c)
0%
d)
Tort Law Questions
Economists believe that many people drive less
carefully after purchasing car insurance. Such
behavior would be classified as:
a)
b)
c)
d)
Adverse selection
Moral hazard
Vicarious liability
An intentional tort, and
therefore a crime
0%
a)
0%
0%
b)
c)
0%
d)
Under a rule of comparative negligence, the
damages awarded to the victim:
a)
b)
c)
d)
Are reduced to zero if the victim was
negligent compared to the injurer.
Include punitive damages when the
injurer was more negligent than the
victim.
Are reduced if the victim was also
negligent.
Are based on the comparative wealth
of the victim and the injurer.
0%
a)
0%
0%
b)
c)
0%
d)
To make the Hand formula an economically correct
statement of negligence requires
a)
b)
c)
d)
e)
Including activity level changes in the
burden of precaution (B).
Substituting incremental for total values in
the formula’s variables.
Substituting the marginal cost of care for B
but leaving unchanged the benefit side of
the formula.
Adjusting the probability of an accident for
the amount of the victim care.
Making explicit the causal connection
between the probability of an accident and
the burden of precaution.
0%
a)
0%
0%
0%
b)
c)
d)
0%
e)
Economics predicts that negligence would be more
efficient than strict liability
a)
b)
c)
d)
when injurers have more information about
accident prevention than victims
when there are large differences among
injurers in the costs of taking care
when a reduction in the victim’s activity level
is the efficient way to prevent an accident
when the cost of victim precautions is greater
than the reduction in expected damages from
these precautions
0%
0%
0%
0%
a)
b)
c)
d)
The economic argument for holding a gun manufacturer
vicariously liable for the intentional torts of its customers is
the following:
a)
b)
c)
d)
the manufacturer is in a better position to
monitor its customers actions than the victim
of the tort.
customers typically lack the wealth to pay for
the damages they cause whereas
manufacturers have deep pockets.
enforcement resources are saved because it is
cheaper to sue one manufacturer than many
customers.
the manufacturer will include its expected
liability cost in the price of the product so
customers, in effect, pay for their torts.
0%
0%
0%
0%
a)
b)
c)
d)
Suppose there is a chance that a child playing in the area of a
construction project might fall in a large hole and injure itself.
Constructing a fence around the project will prevent such an
accident. Assume the harm from such an accident is $100,000,
the probability of an accident equals .01 during the construction
period, the cost of a fence is $5000, the contractor expects a
profit of $25,000, and all parties are risk neutral. Strict liability
will be inefficient because
a)
b)
c)
d)
e)
the contractor will install the fence which
reduces expected wealth by $5000.
it creates no incentive for children or their
parents to take efficient levels of care to avoid
an accident.
the contractor may shut the project down
rather than face a potential liability of
$100,000.
the contractor will install the fence under strict
liability but not under negligence.
all of the above.
0%
a)
0%
0%
0%
b)
c)
d)
0%
e)