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Decoupling Liability: Optimal Incentives for Care and Litigation

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  • A. Mitchell Polinsky
  • Yeon-Koo Che

Abstract

A "decoupled" liability system is one in which the award to the plaintiff differs from the payment by the defendant. The optimal system of decoupling makes the defendant's payment as high as possible. Such a policy allows the award to the plaintiff to be lowered, thereby reducing the plaintiff's incentive to sue -- and hence litigation costs -- without sacrificing the defendant's incentive to exercise care. The optimal award to the plaintiff may be less than or greater than the optimal payment by the defendant. The possibility of an out-of-court settlement does not qualitatively affect these results. If the settlement can be monitored, it may be desirable to decouple it as well.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 3634.

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Date of creation: Dec 1993
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Handle: RePEc:nbr:nberwo:3634

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  1. Katz, Avery, 1990. "The effect of frivolous lawsuits on the settlement of litigation," International Review of Law and Economics, Elsevier, vol. 10(1), pages 3-27, May.
  2. Gary S. Becker & George J. Stigler, 1974. "Law Enforcement, Malfeasance, and Compensation of Enforcers," The Journal of Legal Studies, University of Chicago Press, vol. 3(1), pages 1-18, January.
  3. Polinsky, A Mitchell & Shavell, Steven, 1989. "Legal Error, Litigation, and the Incentive to Obey the Law," Journal of Law, Economics and Organization, Oxford University Press, vol. 5(1), pages 99-108, Spring.
  4. A. Mitchell Polinsky, 1979. "Private versus Public Enforcement of Fines," NBER Working Papers 0338, National Bureau of Economic Research, Inc.
  5. William M. Landes & Richard A. Posner, 1974. "The Private Enforcement of Law," NBER Working Papers 0062, National Bureau of Economic Research, Inc.
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