We analyse the major economic issues raised by the 1997 Tobacco Resolution and the ensuing proposed legislation that were intended to settle tobacco litigation in the United States. By settling litigation largely in return for tax increases, the Resolution was a superb example of a "win-win" deal. The taxes would cost the companies about $1 billion per year, but yield the government about $13 billion per year, and allow the lawyers to claim fees based on hundreds of billions in "damages". Only consumers, in whose name many of the lawsuits were filed, lost out. Though the strategy seems brilliant for the parties involved, the execution was less intelligent. We show that alternative taxes would be considerably superior to those proposed, and explain problems with the damage payments required from the firms, and the legal protections offered to them. We argue that the legislation was not particularly focused on youth smoking, despite the rhetoric. However, contrary to conventional wisdom, youth smokers are not especially valuable to the companies, so marketing restrictions are a sensible part of any deal. The individual state settlements set very dangerous examples which could open up unprecedented opportunities for collusion throughout the economy, and the multistate settlement of November 1998 is equally flawed. The fees proposed for the lawyers (around $15 billion) and the equally remarkable proposed payoff for Liggett (perhaps $400 million annually, for a company with a prior market value of about $100 million) also set terrible examples. We conclude with some views about how public policy might do better.
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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number
2125.
Bulow, J. & Klemperer, P., 1999.
"The Tobacco Deal,"
Economics Papers
1999-w11, Economics Group, Nuffield College, University of Oxford.
Jeremy Bulow & Paul Klemperer, 1999.
"The Tobacco Deal,"
HEW
9904002, EconWPA.
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Find related papers by JEL classification: H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies I18 - Health, Education, and Welfare - - Health - - - Government Policy; Regulation; Public Health K13 - Law and Economics - - Basic Areas of Law - - - Tort Law and Product Liability L41 - Industrial Organization - - Antitrust Issues and Policies - - - Monopolization; Horizontal Anticompetitive Practices L66 - Industrial Organization - - Industry Studies: Manufacturing - - - Food; Beverages; Cosmetics; Tobacco
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