The Welfare Implications of Costly Litigation in the Theory of Liability
NBER Working Paper No. 1834 (Also Reprint No. r1064)
One of the principal results in the economic theory of liability is that, assuming litigation is costless, the rule of strict liability with compensatory damages leads the injurer to choose the socially appropriate level of care. This paper reexamines this result when litigation is costly. It is shown that strict liability with compensatory damages generally leads to a socially inappropriate level of care and to excessive litigation costs. Social welfare can be increased by adjusting compensatory damages upward or downward, with the desired direction depending on the effect of changes in the level of liability on the injurer's decision to take care and on the victim's decision to bring suit.
Published: Polinsky, A. Mitchell and Daniel L. Rubinfeld. "The Welfare Implications of Costly Litigation for the Level of Liability,". From The Journal of Legal Studies, Vol. XVII, No. 1, pp. 151-164, (January 1988).