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Welfare Implications of Costly Litigation under Strict Liability

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  • Keith N. Hylton

Abstract

This article examines a model of strict liability with costly litigation and presents conditions under which (1) potential injurers take optimal precautions, (2) increasing the cost of litigation enhances precaution and social welfare, (3) the optimal level of liability exceeds the compensatory level, and (4) increasing the rate of settlement enhances social welfare. The results have implications for controversies surrounding fee shifting, optimal damage awards (e.g., punitive damages), and the social desirability of settlement. The most striking implication is that fee shifting in favor of prevailing plaintiffs is socially desirable in low-transaction-cost settings. Copyright 2002, Oxford University Press.

Suggested Citation

  • Keith N. Hylton, 2002. "Welfare Implications of Costly Litigation under Strict Liability," American Law and Economics Review, American Law and Economics Association, vol. 4(1), pages 18-43, January.
    • Handle: RePEc:oup:amlawe:v:4:y:2002:i:1:p:18-43
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    Cited by:

    1. Polinsky, A. Mitchell & Shavell, Steven, 2014. "Costly litigation and optimal damages," International Review of Law and Economics, Elsevier, vol. 37(C), pages 86-89.
    2. Liu, Zhiyong & Avraham, Ronen, 2012. "Ex ante versus ex post expectation damages," International Review of Law and Economics, Elsevier, vol. 32(4), pages 339-355.
    3. De Mot, Jef & Miceli, Thomas J., 2019. "The optimal adjustment to liability when litigation is costly: A note," International Review of Law and Economics, Elsevier, vol. 58(C), pages 127-131.
    4. Dirk Czarnitzki & Kristof Van Criekingen, 2018. "New evidence on determinants of IP litigation: A market-based approach," Working Papers of Department of Management, Strategy and Innovation, Leuven 621964, KU Leuven, Faculty of Economics and Business (FEB), Department of Management, Strategy and Innovation, Leuven.
    5. Hylton, Keith N. & Zhang, Mengxi, 2017. "Optimal remedies for patent infringement," International Review of Law and Economics, Elsevier, vol. 52(C), pages 44-57.
    6. De Mot, Jef & Depoorter, Ben, 2010. "Tort law and probabilistic litigation: How to apply multipliers to address the problem of negative value suits," International Review of Law and Economics, Elsevier, vol. 30(3), pages 236-243, September.

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