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Decoupling as Transactions Tax

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  • Nuno Garoupa
  • Chris William Sanchirico

Abstract

In an influential paper, Polinsky and Che propose that litigation can be made a more cost-effective tool for setting primary activity incentives (such as for product safety or promissory performance) by reducing plaintiffs' recovery while simultaneously raising defendants' damages. Decoupling recovery and damages in this manner reduces the number of filed suits but increases the deterrent impact of each. Litigation costs fall, but if damages are raised sufficiently, the level of deterrence is maintained. Yet this story does not account for the fact that when the state takes from liable defendants more than it gives to victorious plaintiffs, it effectively taxes the transaction that led to the litigation. This tax drives a wedge between the private and social benefits of entering the transaction. The result is that socially beneficial transactions may fail to take place. In this paper we explore how this transaction-discouraging aspect of decoupling affects its propriety.

Suggested Citation

  • Nuno Garoupa & Chris William Sanchirico, 2010. "Decoupling as Transactions Tax," The Journal of Legal Studies, University of Chicago Press, vol. 39(2), pages 469-496.
    • Handle: RePEc:ucp:jlstud:doi:10.1086/649045
    DOI: 10.1086/649045
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    References listed on IDEAS

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    1. Claudia M. Landeo & Maxim Nikitin, 2006. "Split-Award Tort Reform, Firm's Level of Care, and Litigation Outcomes," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 162(4), pages 571-600, December.
    2. A. Mitchell Polinsky & Yeon-Koo Che, 1991. "Decoupling Liability: Optimal Incentives for Care and Litigation," RAND Journal of Economics, The RAND Corporation, vol. 22(4), pages 562-570, Winter.
    3. Andrew F. Daughety & Jennifer F. Reinganum, 2003. "Found Money? Split-Award Statutes and Settlement of Punitive Damages Cases," American Law and Economics Review, Oxford University Press, vol. 5(1), pages 134-164.
    4. Albert Choi & Chris William Sanchirico, 2004. "Should Plaintiffs Win What Defendants Lose? Litigation Stakes, Litigation Effort, and the Benefits of Decoupling," The Journal of Legal Studies, University of Chicago Press, vol. 33(2), pages 323-354, June.
    5. Nuno Garoupa & Daniel Klerman, 2002. "Optimal Law Enforcement with a Rent-Seeking Government," American Law and Economics Review, Oxford University Press, vol. 4(1), pages 116-140, January.
    6. A. Mitchell Polinsky, 1986. "Detrebling versus Decoupling Antitrust Damages: Lessons from the Theory of Enforcement," NBER Working Papers 1846, National Bureau of Economic Research, Inc.
    7. Kahan, Marcel & Tuckman, Bruce, 1995. "Special levies on punitive damages: Decoupling, agency problems, and litigation expenditures," International Review of Law and Economics, Elsevier, vol. 15(2), pages 175-185, June.
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    Cited by:

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    2. D’Antoni, Massimo & Tabbach, Avraham D., 2014. "Inadequate compensation and multiple equilibria," International Review of Law and Economics, Elsevier, vol. 38(C), pages 33-47.

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