شکایت های قانونی پرهزینه و خسارات بهینه

A basic principle of law is that damages paid by a liable party should equal the harm caused by that party. However, this principle is not correct when account is taken of litigation costs, because they too are part of the social costs associated with an injury. In this article we examine the influence of litigation costs on the optimal level of damages, assuming that litigation costs rise with the level of damages. Due to this consideration, we demonstrate that optimal damages can lie anywhere between zero and the harm plus the victim's litigation costs.

The standard amount that a party who has been found liable for an injury must pay in damages is the harm caused.2 Several scholars have noted, however, that this basic principle of law is economically problematic because the social cost of a harmful event is not only the harm, but also the associated litigation costs. They have therefore observed that the injurer should bear the harm plus total litigation costs – which implies that the injurer should pay damages equal to the harm plus the victim's litigation costs, since the injurer already bears his own litigation costs.3 We explain here why this conclusion is incorrect when account is taken of the fact that litigation costs generally increase with the level of damages. Consequently, litigation costs can be saved by lowering damages. Due to this consideration, we demonstrate that optimal damages can lie anywhere between zero and the harm plus the victim's litigation costs. The proper level of damages in this range depends on the tradeoff between saving litigation costs and promoting incentives to prevent harm. The issue we are studying is empirically significant because litigation costs are high – on average about two-thirds of harm – and are sensitive to the level of damages.4 For this reason, we believe that the optimal level of damages will often be less than the harm and, when the incentive effect of damages is low, could be zero. We derive our results in Section 2, illustrate them in Section 3, and conclude in Section 4.

We conclude with several remarks about our analysis. (a) Relevance of results. For every dollar transferred from an injurer to a victim through the tort liability system, approximately one dollar of litigation costs is incurred jointly by the parties. 12 Under natural assumptions, this implies that lowering damages by one dollar would reduce litigation costs by approximately 67 cents. 13 Additionally, Lee and Willging (2010) show that lowering damages by one percent would lower litigation costs by half of a percent. 14 These observations suggest that lowering damages would often significantly decrease litigation costs. The countervailing argument to lowering damages is that injurers will have weaker incentives to reduce harm, but this point is not strong in some domains. Notably, incentives to reduce harm would not be affected very much by lower damages when firms face rigorous safety regulation or strong market discipline. Thus, in some important contexts optimal damages may well be less than harm. (b) Settlements. That most cases settle out of court does not fundamentally alter our conclusions. First, cases that settle tend to involve costs because parties often gather evidence, negotiate with each other, and make certain filings or appearances in court before reaching a settlement. Second, settlement costs would be expected to rise with the level of damages that would be awarded at trial for the same reasons that trial costs would rise. Thus, the motive to lower damages in order to reduce legal costs would remain if settlements were taken into account. (c) Negligence rule. Although optimal damages depend on litigation costs under strict liability, they do not depend on litigation costs under the negligence rule in the standard model of accidents and liability. The reason is that litigation does not actually occur under the negligence rule, for injurers are led to be non-negligent. 15 Hence, there is no motive to alter damages from harm on account of litigation costs. However, in more realistic models of the negligence rule, litigation would occur and therefore the general points that we have developed here would be relevant. 16 (d) Alternative ways to control litigation costs. Rather than constraining litigation costs by lowering damages, such costs could be controlled directly by regulating how much parties spend on litigation or by taxing litigation expenditures. However, these alternatives might not be easy to implement because it will often be difficult to identify the resources that parties invest in litigation. Notably, the time devoted to a case by the parties (as opposed to their attorneys) generally will not be observable. Additionally, a lawyer representing a party on a contingency fee basis might not keep a record of how much time he expends on the matter. An advantage of controlling litigation costs by lowering damages is that this method will desirably dampen litigation expenditures even when the parties’ investments in litigation cannot be regulated or taxed. A further advantage of using damages rather than regulation to control litigation costs is that the former approach provides flexibility to the parties to allocate their litigation expenditures (for example, between lawyers and experts) in the most efficient way given the circumstances of their case, whereas regulation would impose restrictions on them that are not tailored to their case.