Decoupling Liability: Optimal Incentives for Care and Litigation

A. Mitchell Polinsky, Yeon-Koo Che

NBER Working Paper No. 3634 (Also Reprint No. r1827)
Issued in December 1993
NBER Program(s):   LE

A "decoupled" liability system is one in which the award to the plaintiff differs from the payment by the defendant. The optimal system of decoupling makes the defendant's payment as high as possible. Such a policy allows the award to the plaintiff to be lowered, thereby reducing the plaintiff's incentive to sue -- and hence litigation costs -- without sacrificing the defendant's incentive to exercise care. The optimal award to the plaintiff may be less than or greater than the optimal payment by the defendant. The possibility of an out-of-court settlement does not qualitatively affect these results. If the settlement can be monitored, it may be desirable to decouple it as well.

(208 K)

Published: Rand Journal of Economics, Vol 44, No. 4, pp. 562-570, (Winter 1991).

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