All-or-Nothing versus Proportionate Damages
This paper considers the choice between an all-or-nothing (AON) rule and a proportionate-damages (PD) rule in civil litigation. Under AON, a prevailing plaintiff receives a judgment equal to his entire damages. Under PD, damages are reduced to reflect uncertainty. For example, if the trier of fact finds that there is a 75 percent chance that the defendant is liable, the judgment would equal 75 percent of the plaintiff's damages. Using a moral hazard model that takes into account defendants' decisions to comply with legal rules, evidentiary uncertainty, and settlement, we show that AON usually maximizes the rate of compliance, although it may result in a higher level of litigation. This, in turn, provides an efficiency rationale for the ubiquity of AON in the legal system. (c) 2009 by The University of Chicago. All rights reserved.
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