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Precaution with endogenous litigation choices

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Abstract

A central question in tort liability is how to induce a socially optimal level of precaution. In most analysis it is common to assume that litigation is either costless or the costs are exogenously fixed. Yet, in reality, litigation costs are large and litigants have the ability to choose their own level of litigation expenditure. In this paper we advance the theory of tort liability by investigating the incentive to invest in precaution when litigation efforts are endogenously chosen by parties. We outline a two-stage game where, in stage one, the injurer invests in a level of precaution. In stage two—if harm has been realized—the victim can sue for damages and go to trial. Parties then choose their level of litigation effort in order to win the trial. We model the court’s decision over liability as a stochastic ‘lottery’ contest, where the probability of being successful at trial depends on relative litigation efforts and inherent legal presumptions. We allow the level of precaution to compliment the injurer’s generation of evidence at trial. We show how the equilibrium litigation efforts are chosen and how this determines the equilibrium level of precaution. We compare both strict liability and negligence rules and also solve for the optimal damages to minimize social losses.

Suggested Citation

  • Ian A. MacKenzie, 2014. "Precaution with endogenous litigation choices," Discussion Papers Series 535, School of Economics, University of Queensland, Australia.
  • Handle: RePEc:qld:uq2004:535
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    File URL: http://www.uq.edu.au/economics/abstract/535.pdf
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    References listed on IDEAS

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    1. Hylton, Keith N., 1990. "The influence of litigation costs on deterrence under strict liability and under negligence," International Review of Law and Economics, Elsevier, vol. 10(2), pages 161-171, September.
    2. Stergios Skaperdas & Samarth Vaidya, 2012. "Persuasion as a contest," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 51(2), pages 465-486, October.
    3. Bernardo, Antonio E & Talley, Eric & Welch, Ivo, 2000. "A Theory of Legal Presumptions," Journal of Law, Economics, and Organization, Oxford University Press, vol. 16(1), pages 1-49, April.
    4. George Triantis, 2008. "Evidentiary Arbitrage: The Fabrication of Evidence and the Verifiability of Contract Performance," Journal of Law, Economics, and Organization, Oxford University Press, vol. 24(1), pages 72-94, May.
    5. Chris Sanchirico & George Triantis, "undated". "Evidentiary Arbitrage: The Fabrication of Evidence and The Verifiability of Contract Performance," University of Virginia John M. Olin Program for Law & Economics Working Paper Series uvalwps-1011, University of Virginia School of Law.
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    More about this item

    Keywords

    tort law; litigation; strict liability; negligence;

    JEL classification:

    • D72 - Microeconomics - - Analysis of Collective Decision-Making - - - Political Processes: Rent-seeking, Lobbying, Elections, Legislatures, and Voting Behavior
    • K13 - Law and Economics - - Basic Areas of Law - - - Tort Law and Product Liability; Forensic Economics
    • K41 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior - - - Litigation Process

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