NBER WORKING PAPER SERIES ECONOMIC ANALYSIS OF ACCIDENT ...

NBER WORKING PAPER SERIES

ECONOMIC ANALYSIS OF ACCIDENT LAW Steven Shavell Working Paper 9694

NATIONAL BUREAU OF ECONOMIC RESEARCH

1050 Massachusetts Avenue Cambridge, MA 02138 May 2003

Research support from the John M. Olin Center for Law, Economics, and Business is gratefully acknowledged.The views expressed herein are those of the authors and not necessarily those of the National Bureau of Economic Research. ?2003 by Steven Shavell. All rights reserved. Short sections of text not to exceed two paragraphs, may be quoted without explicit permission provided that full credit including ?notice, is given to the source.

Economic Analysis of Accident Law Steven Shavell NBER Working Paper No. 9694 May 2003 JEL No. D00, D8, K13

ABSTRACT

Accident law is the body of legal rules governing the ability of victims of harm to sue and to collect payments from those who injured them. This paper contains the chapters on accident law from a general, forthcoming book, Foundations of Economic Analysis of Law (Harvard University Press, 2003). The analysis is first concerned (chapters 2-4) with the influence of liability rules on incentives to reduce accident risks. Then consideration of accident law is broadened (chapter 5) to reflect the effect of liability rules on compensation of victims and the allocation of risk. In this regard a central issue is the roles of victims' insurance and of liability insurance, and how they alter the incentives inherent in liability rules. Finally, the administrative costs of the liability system, namely, the private and public legal costs of litigation, are examined (chapter 6). These costs are significant and thus bear importantly on whether use of accident law is socially desirable. It is emphasized that social intervention -- either to curtail use of the legal system or to encourage it -may well be needed because the private incentives to use the system are generally different from the socially desirable incentives to do so.

Steven Shavell Harvard Law School 1575 Massachusetts Avenue Hauser Hall 508 Cambridge, MA 02138 and NBER shavell@law.harvard.edu

Table of Contents

Economic Analysis of Accident Law

(part of Foundations of Economic Analysis of Law)

Chapter 1. Introduction 1. The Economic Approach to the Analysis of Law 2. Outline and Goal

Chapter 2. Liability and Deterrence: Basic Theory 1. Unilateral Accidents and Levels of Care 2. Bilateral Accidents and Levels of Care 3. Unilateral Accidents: Levels of Care and Levels of Activity 4. Bilateral Accidents: Levels of Care and Levels of Activity

Chapter 3. Liability of Firms 1. Victims Are Strangers to Firms 2. Victims Are Customers of Firms

Chapter 4. Extensions of the Basic Theory 1. Problems in the Negligence Determination 2. Why Negligence Is Found and Implications of Findings of Negligence 3. Injurers' Inability to Pay for Losses: The Judgment-Proof Problem 4. Vicarious Liability 5. Damages and the Level of Losses 6. Damages and the Probability of Losses 7. Damages and Courts' Uncertainty about the Level of Losses 8. Damages and Pecuniary versus Nonpecuniary Losses 9. Damages Greater than Losses: Punitive Damages 10. Damages and Victims' Opportunities to Mitigate Losses 11. Causation

Chapter 5. Liability, Risk-bearing, and Insurance 1. Risk Aversion and the Socially Ideal Solution to the Accident Problem 2. The Accident Problem in the Absence of Liability and Insurance 3. The Accident Problem Given Liability Alone 4. The Accident Problem Given Liability and Insurance 5. The Purpose of Liability 6. Extension: Nonpecuniary Losses 7. Extension: The Judgment-Proof Problem

Chapter 6. Liability and Administrative Costs 1. Nature and Importance of Administrative Costs 2. Socially Desirable Use of the Liability System Given Administrative Costs 3. Private versus Social Incentive to Use the Liability System Given Administrative Costs

Summary Table of Contents of

Foundations of Economic Analysis of Law

(forthcoming 2003, Harvard University Press)

Chapter 1. Introduction

Part One. Accident Law Chapter 2. Liability and Deterrence: Basic Theory Chapter 3. Liability of Firms Chapter 4. Extensions of the Basic Theory Chapter 5. Liability, Risk-bearing, and Insurance Chapter 6. Liability and Administrative Costs

Part Two. Property Law Chapter 7. Definition, Justification, and Emergence of Property Rights Chapter 8. Division of Property Rights Chapter 9. Acquisition and Transfer of Property Chapter 10. Conflict and Cooperation in the Use of Property: The Problem of Externalities Chapter 11. Public Property Chapter 12. Property Rights in Information

Part Three. Contract Law Chapter 13. Overview of Contracts Chapter 14. Contract Formation Chapter 15. Production Contracts Chapter 16. Other Types of Contract

Part Four. Litigation and the Legal Process Chapter 17. Basic Theory of Litigation Chapter 18. Extensions of the Basic Theory of Litigation Chapter 19. General Topics on the Legal Process

Part Five. Public Law Enforcement and Criminal Law Chapter 20. Deterrence with Monetary Sanctions Chapter 21. Deterrence with Nonmonetary Sanctions Chapter 22. Extensions of the Theory of Deterrence Chapter 23. Other Functions of Sanctions: Incapacitation, Rehabilitation, Retribution Chapter 24. Criminal Law

Part Six. General Structure of the Law Chapter 25. The General Structure of the Law and Its Optimality

Part Seven. Welfare Economics, Morality, and the Law Chapter 26. Welfare Economics and Morality Chapter 27. Implications for the Analysis of Law Chapter 28. Income Distributional Equity and the Law

*** Chapter 29. Commonly-Raised Questions about Economic Analysis of Law

Economic Analysis of Accident Law

(part of Foundations of Economic Analysis of Law)

Steven Shavell

?2002. Steven Shavell. All Rights Reserved.

Chapter 1

INTRODUCTION

1. The Economic Approach to the Analysis of Law Under the economic approach to the analysis of law, two basic types of questions about legal rules are addressed. The first type is descriptive, concerning the effects of legal rules. For example, what is the influence of our system of liability for automobile accidents on the number of these accidents, on the compensation of accident victims, and on litigation expenses? The other type of question is normative, pertaining to the social desirability of legal rules. Thus, it might be asked whether our system of liability for automobile accidents is socially good, given its various consequences.

In answering the two types of questions under the economic approach, theoretical attention is usually focused on stylized models of individual behavior and of the legal system. The advantage of studying models is that they allow descriptive and normative questions to be answered in an unambiguous way, and that they may clarify understanding of the actual influence of legal rules on behavior and help in the making of legal policy decisions.

Descriptive analysis. When considering the descriptive questions in the models, the view taken will generally be that actors are forward looking and "rational." That is, they will behave so as to maximize their expected utility. Given the characterization of individuals' behavior as rational, the influence of legal rules on behavior can be ascertained. This can be done with definitude in the world of the models, because all relevant assumptions about individuals' desires, their knowledge, their capabilities, and the environment will have been made explicit. For example, whether a person will drive carefully will be determinable, for it will have been stated how difficult it is for the person to exercise precaution, whether the person will himself be at risk of injury from an automobile accident, what the rule of liability is, what circumstances will give rise to suit, whether the person owns accident insurance and liability insurance, and so forth.

Normative analysis.1 The evaluation of social policies, and thus of legal rules, will be

1The discussion to follow here is amplified in chapters 26-28 of the book.

Chapter 1 ? Page 1

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