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Should Liability be Based on the Harm to the Victim or the Gain to the Injurer?

  • A. Mitchell Polinsky
  • Steven Shavell

Should the level of liability imposed on an injurer be based on the harm he caused or instead on the gain he obtained from engaging in the harmful act? The main point of this article is that there is a strong reason to favor liability based on harm rather than gain when account is taken of the possibility of legal error. Notably, even a small underestimate of gain can lead an injurer to commit a harmful act when the harm greatly exceeds his gain, causing a large social loss. In contrast, a comparable error in the estimate of harm will not lead an injurer to engage in the harmful act when the harm significantly exceeds his gain. The general superiority of harm-based liability is shown to hold under the rules of negligence and strict liability and regardless of whether potential injurers know the error that will be made.

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File URL: http://www.nber.org/papers/w4586.pdf
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 4586.

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Date of creation: Dec 1993
Date of revision:
Publication status: published as Journal of Law, Economics & Organization, Vol. 10, No. 2 (October 1994)pp. 427-437
Handle: RePEc:nbr:nberwo:4586
Note: LE
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  1. Wittman, Donald, 1985. "Should compensation be based on costs or benefits?," International Review of Law and Economics, Elsevier, vol. 5(2), pages 173-185, December.
  2. Craswell, Richard & Calfee, John E, 1986. "Deterrence and Uncertain Legal Standards," Journal of Law, Economics and Organization, Oxford University Press, vol. 2(2), pages 279-303, Fall.
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