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The Welfare Implications of Costly Litigation in the Theory of Liability

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  • A. Mitchell Polinsky
  • Daniel L. Rubinfeld

Abstract

One of the principal results in the economic theory of liability is that, assuming litigation is costless, the rule of strict liability with compensatory damages leads the injurer to choose the socially appropriate level of care. This paper reexamines this result when litigation is costly. It is shown that strict liability with compensatory damages generally leads to a socially inappropriate level of care and to excessive litigation costs. Social welfare can be increased by adjusting compensatory damages upward or downward, with the desired direction depending on the effect of changes in the level of liability on the injurer's decision to take care and on the victim's decision to bring suit.

Suggested Citation

  • A. Mitchell Polinsky & Daniel L. Rubinfeld, 1986. "The Welfare Implications of Costly Litigation in the Theory of Liability," NBER Working Papers 1834, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:1834
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    References listed on IDEAS

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    1. Marilyn J. Simon, 1981. "Imperfect Information, Costly Litigation, and Product Quality," Bell Journal of Economics, The RAND Corporation, vol. 12(1), pages 171-184, Spring.
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    Cited by:

    1. Boskin, Michael J., 1988. "Issues in the Measurement and Interpretation of Saving and Wealth," CEPR Publications 244418, Stanford University, Center for Economic Policy Research.
    2. Eric Rasmusen, 1995. "``Predictable and Unpredictable Error in Tort Awards: The Effect of Plaintiff Self Selection and Signalling,''," Law and Economics 9506003, University Library of Munich, Germany.

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