Encyclopedia of Law and Economics
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Encyclopedia of Law and Economics

Edited by Gerrit De Geest

The second, expanded edition of the acclaimed Encyclopedia represents a major update of the most authoritative reference work in the field of law and economics and the nine print volumes are now released online as a single integrated product. The Encyclopedia provides balanced and comprehensive coverage of the major domain in law and economics, including: criminal law, regulation, property law, contract law, tort law, labor and employment law, antitrust law, procedural law, and the production of legal rules. Each theme or volume is overseen by a leading scholar and each of the 156 entries is prepared by an expert in the field, providing an in-depth and authoritative overview of the individual topic, combined with an exhaustive bibliography, allowing users to access and filter the entire corpus of literature in law and economics. As with the print edition, the Encyclopedia is unique in serving both as an entry point and a platform for advanced research. The online edition is enhanced with Elgaronline’s powerful search tools, facilitating the search for key terms across the entire Encyclopedia, whilst the browse function allows users to move seamlessly between the volumes. These elements combine to create a powerful research tool for any researcher or scholar in the field of law and economics.
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General introduction

Michael Faure

[In: Volume 1, Michael Faure (ed) Tort Law and Economics]

1 Goal of this book

A central goal of this book is to provide a state of the art overview of the literature with respect to the economic analysis of tort law. The organisation of this book, whereby in 16 chapters various aspects of tort law are examined, is such that the reader not familiar with the area will get an overview of the relevant economic literature. The authors have always attempted to show the evolution of the literature in the particular domain, the further refinements of economic models and the main conclusions from this literature for the policy maker. Hence, the overviews should enable the reader to get acquainted easily with the often vast literature in the particular domain. For those who are interested in further study or reading, every chapter contains a detailed bibliography with a selection of the literature on that particular topic.

This book fits into a general series of books which together constitute the Encyclopedia of Law and Economics. It builds further on the Bibliography of Law and Economics (Bouckaert and De Geest, 1992 ), which merely contained literature references to the various domains of law and economics, as well as on the earlier version of the Encyclopedia of Law and Economics which was published in 2000. That Encyclopedia was published both in hard copy as well as electronically (Bouckaert and De Geest, 2000 ). However, an update of this project was needed because since 2000, there have been many evolutions and further refinements in the literature.

Whereas the economic analysis of tort law originated in the US and also acquired followers in the late 1980s and 1990s, the movement has clearly expanded to other continents as well. A large part of the literature on the economics of tort now also comes from Europe and Asia. A consequence of this increasing popularity of applying economic concepts to tort caused, however, the problem that over a period of almost ten years, the literature has developed so quickly that a new issue of the Encyclopedia had become necessary.

Some topics related to the economics of tort were already present in the 2000 version of the Encyclopedia. However, since this new Encyclopedia could contain a special issue completely devoted to tort, many other topics could be added as well. Since the literature has developed so rapidly, contributors have not been asked to provide what in their view would be a complete list of all the references with respect to a particular topic. p. xxiiContributors have rather been invited to provide a list of the most important references which will allow the reader to engage in further reading.

2 The authors

The authors who wrote the various chapters in this book are leading experts either in tort law or in the law and economics of tort in a particular field and constitute a mix of both lawyers and economists as well as comprising authors from the US as well as from Europe. Many contributions constitute updates by the authors who contributed to the 2000 version of the Encyclopedia. Where these authors were willing to update their previous versions, they were invited to do so. In case the authors of the chapters in the 2000 Encyclopedia were not able to revise their chapters, new authors have been approached to write a completely new chapter, of course taking into account the findings in the 2000 Encyclopedia. For topics which were not contained in the 2000 Encyclopedia (like, for example, the empirical perspective, medical malpractice or pure economic loss), new authors have been approached.

A complete list of the authors and their affiliations is provided in the list of contributors included after the table of contents.

3 The topics and structure

The 16 chapters in this book have been brought together in seven different parts in an attempt to bring together related papers and impose a structure on this volume.

Part I deals with the central question of efficient liability rules. It deals with the basic literature on what is a central question in tort law and economics, namely under what circumstances a strict liability rule will be more efficient than negligence. This is the topic of chapter 1 by Hans-Bernd Schäfer and Frank Müller-Langer. A related issue is how in bilateral accident situations (where the victim can also have an influence on the accident risk) incentives can be provided to all parties in the accident setting. It is the question which in the literature is known as the study of the comparative efficiency of contributory and comparative negligence rules and is dealt with by Mireia Artigot i Golobardes and Fernando Gómez Pomar in chapter 2 .

Part II deals with causation and multiple tortfeasors. The chapters brought together in this part have in common that they study problems that arise when there is no clear linear and simple relationship between a certain behaviour and a tortfeasor. When complications arise, uncertainties may appear, for example in the relationship between the behaviour and the damage. These issues of causation and foreseeability are dealt with by Omri Ben-Shahar in chapter 3 . Clearly related are issues of multiple tortfeasors where more than one person has contributed to the harm. The rules dealing with the apportionment of damages in those situations p. xxiii(joint and several liability or several only liability) are examined by Lewis Kornhauser and Richard Revesz in chapter 4 . Also vicarious liability is one way of moving beyond the original tortfeasor and making for example a principal liable for the misconduct of an agent. Reasons for moving beyond the original tortfeasor towards for example a corporation are critically discussed by Reinier Kraakman in chapter 5 dealing with vicarious and corporate civil liability.

Part III deals with the broad notion of damages from an economic perspective. The central idea of the function of damages as providing incentives to the tortfeasor (and the victim) and the consequences for the types and amounts of damages to be compensated by the legal system are discussed in general by Louis Visscher in chapter 6 on tort damages. The complicated question of whether pure economic loss should be compensated as well as an economic appraisal of why legal systems have apparently different attitudes to this question is dealt with by Jef De Mot in chapter 7 . The economic reasons for compensating non-pecuniary losses (deterrence and/or compensation) are critically discussed in chapter 8 by Siewert Lindenbergh and Peter van Kippersluis. A. Mitchell-Polinsky and Steven Shavell discuss the main social goals for awarding punitive damages (deterrence and punishment) in chapter 9 .

Part IV deals with the application of the general findings of the economic literature on tort (dealt with in the first three parts) to a few specific cases. Tort law has undoubtedly recently also been expanding to other domains where its application gives rise to specific questions. One area where tort law is gaining popularity is undoubtedly environmental liability, which is dealt with by Michael Faure in chapter 10 . Mark Geistfeld deals with the well-known area of product liability in chapter 11 and Steve Boccara with medical malpractice in chapter 12 .

Part V deals with compensation systems other than the tort system and thus addresses the question to what extent alternatives can be worked out if victim compensation is a policy goal. In this respect, Gerhard Wagner deals with the relationship between tort law and insurability and also addresses to what extent insurance issues may be decisive for the liability question. Next, Karine Fiore addresses no-fault compensation systems in chapter 14 , thereby analysing both the compensatory and deterrence potential of those alternative compensation schemes.

Part VI deals with perspectives on tort law other than the economic approach. Willem van Boom deals with comparative tort law and economics.

Finally, part VII deals with the highly important issue of the empirical evidence concerning the effectiveness of the tort law system. The literature in this respect is summarized in chapter 16 by Ben van Velthoven.

p. xxivOf course, there is some unavoidable overlap since questions, such as for example the optimal liability rule, may be discussed in a number of chapters, but each time from a different perspective.

In this introduction, some of the main findings presented in the chapters will be summarized. Of course, it is not at all useful to attempt to rehearse what has been mentioned and discussed in the chapters. However, some similarities and differences between the approaches presented in the chapters will be sketched in order to attempt to identify a few common lines of development in the economic analysis of torts.

4 Historic evolution of tort law and economics: the basic ideas

After Ronald Coase implicitly started the law and economics movement with his seminal paper on ‘The problem of social cost’ (Coase, 1960 ), it was the lawyer Guido Calabresi who with his publication ‘Some thoughts on risk distribution and the law of torts’ (Calabresi, 1961 ) started to develop the economic analysis of tort law. In his The Costs of Accidents, Calabresi developed a framework for dealing with accidents through torts and alternative instruments, for the first time using insights from economic theory (Calabresi, 1970 ). Calabresi used the economic notion that accident costs constitute externalities which have to be internalised by the wrongdoer. Moreover, Calabresi used the simple economic wisdom that ‘our society is not committed to preserving life at any cost’. 1 He thus called for the application of cost-benefit analysis to tort law and argued that ‘we use relatively safe equipment rather than the safest imaginable because – and it is not a bad reason – the safest costs too much’. 2

As Artigot i Golobardes and Gómez Pomar show in chapter 2 , Judge Learned Hand had in fact already in 1947 used a proportionality test to conclude that a party should be required to take care only up to the point where the costs of such care become equal to or greater than the expected cost of the accident.

In later years, the economic analysis of tort law has gone through a rapid development starting with Posner’s JLS paper on a theory of negligence in 1972, followed the next year by J.P. Brown’s ‘Toward an economic theory of liability’ (Posner, 1972 ; Brown, 1973 ). Whereas Posner used economic tools to explain certain developments in case law by common law judges (arguing that they were in fact acting as if they were promoting economic efficiency), J.P. Brown developed the first economic model addressing the question of how various liability rules (more p. xxvparticularly strict liability and negligence) could achieve the social goal of the minimisation of accident costs, already identified by Calabresi. The basic assumption in what later became known as the neo-classical model of tort law was that injurers and victims (hence the participants in a potential accident setting) are rational individuals who react to applicable tort rules striving to maximise their utility. Since then, economic models have always relaxed the assumptions and become more refined in order to make predictions concerning the efficiency of liability rules closer to the reality of the accident setting. For example, in 1974, Diamond added the importance of the activity level (in addition to care) in determining the accident risk (Diamond, 1974 ) and Shavell’s 1980 JLS paper on strict liability versus negligence formalised optimal liability rules in both unilateral (when only one party can influence the accident risk) as well as bilateral (when both injurer and victim can influence the accident risk) accident situations, addressing the influence of both care and the activity level (Shavell, 1980 ). Many further refinements were provided inter alia by Grady (Grady, 1983 ).

The first chapter by Schäfer and Müller-Langer nicely shows how precisely on this crucial point of the comparative efficiency of strict liability versus negligence assumptions have always been further relaxed, leading to the point where the literature can now provide rather detailed advice to the policy maker on situations in which one liability rule might be better suited than the other. They stress that in principle (but under strict assumptions concerning the ability of the judge to correctly assess damages) strict liability with a defence of contributory or comparative negligence should be preferred to negligence since the latter rule only leads to efficient results if courts are able to fix the required level of due care equal to the efficient level of care. However, they equally show that when assumptions concerning the ability of the judge to assess damages correctly are relaxed, some of the advantages of strict liability disappear, which is also the case if injurers are judgement proof.

A similar evolution concerning the literature is shown with respect to bilateral accident situations by Artigot i Golobardes and Gómez Pomar in chapter 2 , showing that whereas the literature initially held that contributory negligence (which means that when the victim’s level of care falls short of the desired level no compensation is owed by the injurer) would be preferred to a comparative negligence rule (whereby the victim’s claim on compensation would simply be reduced in proportion to the victim’s contribution to the loss), but then after publications in the 1980s scholars demonstrated that in fact under both rules injurers and victims are given incentives to take efficient care. However, they equally show that developments never end since the most recent literature (from 2003) p. xxviis again increasingly critical concerning the performance of comparative negligence. 3

5 Causation and multiple tortfeasors

Part II brings together papers which all deal in some way with linking a particular type of damage to an actor. Omri Ben-Shahar shows in chapter 3 that originally the early economic analysis of law denied the importance of the causation requirement. He equally shows that early scholars held that the causation requirements served goals other than efficiency. He argues that since a 1975 University of Chicago Law Review article by Calabresi causation was also put on the agenda of economic analysis (Calabresi, 1975 ). Difficulties more particularly arise in case of uncertainty concerning the causal relationship. Ben-Shahar discusses the disadvantage of the approach whereby the probability that event A caused damage B has to pass a certain (usually 50 percent) threshold. The latter is often referred to as an ‘all or nothing’ approach to causation and of course has the obvious disadvantage that it may distort the incentives for parties to take care, more particularly if the probability of causation is systematically below the threshold probability. Economic analysis (and more particularly Shavell) have therefore held that a proportional liability rule whereby the injurer is held to compensate the damage equally to the probability of causation leads to socially optimal levels of care.

Somewhat related is the issue discussed in many publications and equally in chapter 4 by Kornhauser and Revesz of the way in which the legal system should deal with multiple tortfeasors. They sketch the various scenarios of on the one hand a joint and several liability rule and on the other hand a several only (non-joint) liability, comparing both the incentives to settle and the effects on deterrence. They show that under full solvency and a negligence regime, the joint and several liability rule will produce socially optimal results, whereas several only liability leads to underdeterrence. In case of joint tortfeasors, however, they argue that strict liability leads to underdeterrence, regardless of whether it is coupled with joint and several liability or several only liability. Conclusions are different, however, under a potential insolvency, whereby the deterrence effects depend upon the specific assumptions made. They moreover show that, on the basis of the literature, it is held that joint and several liability may increase the uncertainty for insurers about the size of the award that will be paid, thus potentially increasing insurance premiums.

In chapter 5 Kraakman discusses situations where a party other than p. xxviithe original tortfeasor may be held liable to compensate the victim. This is more particularly the case under vicarious and corporate civil liability. He discusses the traditional argument in favour of vicarious (and corporate) liability being that agents (more particularly employees) are more likely to suffer from insolvency than principals (employers). Thus vicarious liability for ordinary torts is, so Kraakman argues, more likely to increase social welfare as the disparity between the agent’s assets and the magnitude of prospective tort liability increases. Similar arguments are also advanced in favour of corporate criminal liability even though there is literature which is equally increasingly critical of corporate criminal liability, inter alia since it may have potentially perverse effects. 4

6 Damages

The chapters brought together in part III discuss the economic function of damages and more particularly the question of how damages should be assessed if optimal deterrence (of both injurers and victims) were the social goal of accidents. Visscher provides a broad overview of all issues involved in the determination of damages and describes inter alia the economic method for the assessment of losses in case of death. He shows, using Kaplow and Shavell, that the abstract method of damage assessment is more efficient than the concrete method since the administrative costs are lower. Moreover, since the injurer cannot ex ante assess how much loss he will cause, a better (more accurate) assessment ex post will not change his behaviour ex ante (Kaplow and Shavell, 1996 ). Visscher equally discusses many other aspects of damage assessment, inter alia the point often made in the economic literature that damages for fatal accidents are often too low from an economic perspective. He argues that incorporating the literature estimating the value of a statistical life could lead to a better assessment of damages in the case of fatal accidents, at least with better incentives for injurers.

Many of Visscher’s points are worked out in further detail in subsequent chapters, for example in chapter 8 by Lindenbergh and van Kippersluis discussing compensation for non-pecuniary losses. They make a distinction between various functions of compensating non-pecuniary losses. The economic literature has argued that since victims would not self-insure against non-pecuniary losses, compensation cannot be an adequate reason to force injurers to pay for pain and suffering. From an economic perspective, deterrence is the appropriate reason to force injurers to compensate non-pecuniary losses as well. However, since a rational victim would not p. xxviiiself-insure against those losses, liability could be decoupled since injurers could then still be exposed to pay damages (for optimal deterrence) but not necessarily to the victim.

The complicated issue of whether compensation should be awarded for so-called pure economic loss is addressed by De Mot in chapter 7 . He shows that traditional explanations seeking to justify the denial of compensation for pure economic loss in many legal systems which are not based on notions of efficiency all lead to practical inconsistencies. Economic analysis traditionally provided a more powerful explanation (based on the fact that an economic loss would merely lead to a private loss for the victim but not necessarily to a social loss). Compensation of an economic loss which would not at the same time constitute a social loss would thus only lead to a waste of administrative costs. However, De Mot holds that more recent literature comes to more nuanced conclusions and shows that also large differences still exist between legal systems as far as the recoverability of pure economic loss is concerned, which can so far also not be fully explained on economic grounds.

chapter 9 by Polinsky and Shavell discusses the deterrence and punishment-based explanations of punitive damages. They show that according to the basic economic theory of torts, punitive damages are basically used to outweigh the situations where the probability of being found liable is less than one. To outweigh this lower probability, damages have to be higher than compensatory in order still to reach deterrence. Several other economic explanations, also relating to the fact that harm can be underestimated or gains can be socially illicit, are presented as well. They also argue that the punishment objective may conflict somewhat with the deterrence objective since for punishment, the level of damages is likely to be higher if the chance of being found liable is high, whereas for deterrence, damages should be high precisely if the probability of being found liable is low. The optimal level of damages overall, thus maximising both deterrence and punishment, may therefore result in a compromise between both objectives.

7 Specific cases

Part IV contains a few chapters dealing with specific types of tort. In these cases, basically the general models are applied and some specificities related to the cases are stressed. A common feature in two specific tort cases (products liability and medical malpractice) is that a contractual relationship exists between the potential injurer and the victim. As Geistfeld shows in chapter 11 , this potentially gives rise to contractual solutions as a result of which the producer would adopt an efficient care and activity level. However, he equally makes clear that contracting will not lead p. xxixto efficient outcomes when information costs prevent consumers from being adequately informed about product risk. In that respect, Geistfeld notices (again) a remarkable development and refinement of the economic models. Where in the mid-1970s economic analysis of product liability was based on the study of the market behaviour of perfectly informed, completely rational actors, this has since completely changed. Economists now regularly address the type of (informational and other) problems that courts have long had to confront without the aid of economic analysis. A similar development can be noticed in the field of medical malpractice as sketched by Boccara in chapter 12 . The first law and economics publications in this domain which emerged in the mid-1970s, mostly by Epstein ( 1976 ), also suggested that private agreements between the physician and the victim could lead to optimal solutions concerning the level of care and desired allocation of risk, taking into account varying preferences. Later the literature took into account the difficulties for the patient of assessing the physician’s care as well as the difficulties for the physician in passing on liability costs via the price system. Especially in Europe where healthcare services are highly regulated, this (Coasean) idea of passing on liability costs via the price system is in practice often not feasible. Still both chapters 11 and 12 show that the starting point for the analysis is different where (as in the fields of product liability and medical malpractice) a contractual relationship between the injurer and potential victim exists. In cases where the potential victim would be informed about the allocation of risk, society should in principle worry less about efficient liability rules since these could result from Coasean bargaining between the parties. Even when this bargaining may not be feasible, given information problems, the contractual relationship remains important since providing information on the risks may in some cases be a more appropriate tool than immediately regulating the liability rule to be applied.

Another specific case on which quite a bit of economic analysis has emerged concerns environmental liability. chapter 10 makes clear that environmental liability is for obvious reasons a good candidate for economic analysis: whereas traditional lawyers will sometimes challenge the starting point from economic analysis that potential parties in an accident setting will adopt their behaviour on the basis of an applicable liability rule, this assumption seems to be less of a problem in environmental liability. The idea that potential polluters adapt their behaviour when confronted with liability costs is now common also among many environmental lawyers. Environmental liability is for example a field where the traditional choice between strict liability and negligence (explained in chapter 1 by Schäfer and Müller-Langer) clearly leads to favouring a strict liability regime since these cases can mostly be considered as unilateral or at least p. xxxas situations where the injurer has more influence on the accident risk than the victim. However, given a potentially important insolvency risk inherent in environmental pollution cases, strict liability may be inefficient when the magnitude of the damage exceeds the polluter’s assets. This provides a strong case for imposing duties on the potential polluter to provide financial guarantees to cover his liability such as for example compulsory insurance. Moreover, environmental liability is also a field where often the fundamental question arises as to what the particular function of a liability system is. If the deterrence of polluting behaviour is the main goal of environmental liability, applying new liability rules to past pollution (so-called retroactive liability) is clearly inefficient. Nevertheless, one can notice in many environmental liability rules (such as those which emerged under CERCLA, also known as the superfund legislation) that potentially responsible parties are held liable also for pollution with a source in a distant past. This clearly shows that the policy maker in this area also has other objectives than preventing environmental pollution through deterrence. Also the problem of causal uncertainty discussed by Ben-Shahar in chapter 3 can play an important role in environmental liability cases in as far as the causal relationship between for example a particular emission and (health) damage cannot be established with certainty. Again, the solution proposed by Shavell and discussed in chapter 3 by Ben-Shahar which would provide efficient incentives to potential polluters aiming at welfare maximisation is a proportional liability rule.

8 Alternative compensation systems

Even though traditional lawyers still see victim compensation as the main task of tort law, it has been an important achievement of economic analysis to show lawyers that tort law is a particularly ill-suited instrument to reach victim compensation. Already in 1965 Calabresi held that ‘if compensation were the only goal, then by far the most effective and efficient method of accomplishing it would be through a system of general social insurance, which would externalise the costs of accidents from any market decisions’. 5 Even though Calabresi of course recognised that risk-spreading is an autonomous goal of tort law as well (referred to by Calabresi as the so-called secondary cost reduction), many alternatives have also been worked out which can precisely achieve this goal of victim compensation at lower costs. The chapters in part V deal more specifically with these alternative compensation systems and more specifically with their relationship to the tort system as well. Wagner sketches in general in chapter 13 how various p. xxxiinsurance arrangements can guarantee adequate victim compensation. In this respect, he also stresses the traditional argument made by many economists that first party insurance may even be better able to provide victim compensation since it would allow for a better risk differentiation than third party insurance. However, insurance can also be considered as an important instrument to improve deterrence, more particularly in the situation where injurers could be underdeterred through their insolvency. This is, as Wagner shows, the traditional economic argument in favour of compulsory insurance, even though alternative means (such as minimum asset requirements) could serve this goal as well. The benefits of compulsory insurance are also stressed in chapter 14 by Fiore, dealing more generally with no-fault compensation systems. She equally stresses the inability of the tort system to provide victim compensation and thus sketches the road which has been followed in many jurisdictions towards so-called no-fault compensation systems. Even though these systems are supposed to provide higher compensation at lower cost, the major disadvantage is that potential injurers are no longer exposed to liability (in cases where no fault systems would be exclusive), which could potentially lead to underdeterrence.

Both chapters 13 and 14 also address the influence of insurance or other alternative compensation mechanisms on tort law and Wagner inter alia analyses whether the mere fact of having liability insurance should have a bearing on the liability issue which is denied from an economic perspective. These chapters also pay attention to the question of how the tort system should be shaped to promote the insurability of particular risks. This is an issue which is also addressed in many other contributions. For example, Kornhauser and Revesz show in chapter 4 that joint and several liability, even though it can (depending upon the levels of solvency of the defendants) in some cases be argued to promote efficiency, may lead to higher insurance costs. The simple reason is that joint and several liability increases uncertainty about the size of the award that will be paid. Considerations concerning insurance and alternative compensation mechanisms also play an important role with some of the specific cases discussed in part IV . For example in chapter 10 it is argued that problems of causal uncertainty or retroactive liability could endanger the insurability of environmental risks. Given difficulties of insurance, one can notice that more particularly for environmental damage many alternative compensation systems (for example in the field of oil pollution damage) have been developed. A similar conclusion about the inability of the tort system to adequately compensate victims is reached by Geistfeld with respect to products liability in chapter 11 . He also argues that requiring sellers to pay for product-caused injuries is likely to increase the average costs of injury compensation as compared to alternative insurance arrangements. Also p. xxxiiin the medical malpractice area, Boccara discusses in chapter 12 alternative compensation mechanisms that have been developed in many legal systems. However, empirical evidence seems to indicate that a shift towards a no-fault compensation system negatively affects the incentives for care.

9 Importance of regulation

Whereas we just indicated that many scholars point to the superiority of alternative mechanisms (such as insurance) to provide victim compensation, at least when compared to the tort system, many contributors have also shown that in particular circumstances the tort system may not be optimal in providing efficient incentives for prevention. The reasons are well known and have been identified in Shavell’s criteria for regulation (Shavell, 1984 ). Ben-Shahar in chapter 3 (but also many other contributors) stress that the tort system may not be able to exercise its preventive function more particularly when for example because of causal uncertainty there is a likelihood that the injurer will not be held to compensate for the harm he has actually caused. In those cases where victims may not be able to bring a liability suit and public authorities may have superior information, ex ante standard setting through regulation may provide better results for prevention than the tort system. 6 Not surprisingly, the chapters dealing with specific cases also stress the shortcomings of the tort system as far as providing incentives for prevention is concerned and hence point to the superiority of ex ante regulation. This is for example stressed in chapter 10 as far as environmental liability is concerned, but equally by Geistfeld in chapter 11 for the area of product liability (and product safety) and by Boccara in chapter 12 for the domain of medical malpractice. However, notwithstanding some weaknesses of the tort system, many contributors equally stress that regulation may not be perfect either. For example in the medical malpractice area it is rightly stressed that the self-regulation imposed upon physicians can often contain standards of care which are lower than the optimal ones. Hence, liability rules may still have an important function in addition to regulation, more particularly to function as a stop gap to cover imperfections in regulatory standards. The fact that in most legal systems liability suits are still possible in addition to the regulatory system also raises important questions concerning the mutual interdependence of regulation and the tort system. 7

10 p. xxxiiiFairness in tort

A classic argument against the economic analysis of tort that was (in the past) sometimes advanced by traditional lawyers is that tort law should not be analysed in terms of economic efficiency since its goal should not be efficiency (minimisation of accident costs) but rather fairness. The weakness of this argument has been convincingly shown in general by Kaplow and Shavell ( 2001 ). In the area of tort, ‘traditional’ tort lawyers have increasingly become convinced of the importance of economic analysis. Even if they still see victim compensation as the main goal of tort law, they accept the argument that economics can teach how this victim compensation can be achieved at the lowest cost possible. Moreover, the basic economic idea that the tort system does not only have a compensatory effect (if at all), but also aims at providing incentives to the parties involved in the accident setting towards efficient care is a notion that is increasingly accepted by lawyers. The chapters dealing with environmental liability, product liability and medical malpractice, for example, show that the belief that the exposure to liability may have a deterrent effect plays an important role in the tendency towards an expanding liability in those areas.

Moreover, many contributions to this book show also that in economic analysis attention can be paid to the distributional effects of the choice of a particular tort law regime. Even if one does not accept the importance of the efficiency criterion at a normative level, economics remains important in showing the distributional effects of various liability rules and the potential costs involved in these distributional choices. In some cases, the distributional effects will of course be decisive for the legislator. Many examples are provided. For example, Schäfer and Müller-Langer show in chapter 1 that the classic choice between strict liability and negligence is at the policy level not only determined by the effects on incentives to take efficient care of the parties involved in the accident setting, but also by the fact that (if the insolvency problem can be cured) strict liability in principle guarantees compensation of the victim whereas a negligence rule does not. That difference has of course been an important reason for the popularity of this rule, for example in the area of environmental liability (where it is based on the polluter-pays principle), but also in the area of enterprise liability. Kraakman shows in chapter 5 that tendencies in case law towards an increasing personal liability of managers for corporate torts can be understood as protecting tort victims against undercapitalised firms.

Also the decline of contributory negligence (whereby the victim completely loses his claim on compensation if the accident was (also) due to his fault) has to a large extent been based on fairness considerations. Artigot i Golobardes and Gómez Pomar show in chapter 2 that the harshness of a pure contributory negligence rule was considered unfair since it leads to p. xxxivmaking the victim bear the entire loss even when that loss was caused in part by others. Also Kornhauser and Revesz show in chapter 4 that joint and several liability may have been based on the idea that the victim should not be faced with the burden of having to sue various defendants in order to obtain full compensation of his loss. However, they show that (dependent upon the solvency of the actors involved) joint and several liability may in some cases lead to increasing a tortfeasor’s expected liability beyond the level of harm he actually caused. Placing such a disproportionate burden on the injurer may thus be questioned on fairness grounds. The latter example also shows that introducing the notion of fairness into tort law leads to the difficulty that in some cases fairness seems to be equated with victim compensation. This may thus lead for example to imposing a retrospective liability on tortfeasors or shifting the burden of proof in case of causal uncertainty to tortfeasors. These policy decisions, which are often based on deep pocket considerations (in case the defendants are corporate actors), can, however, equally be challenged on fairness grounds to the extent that they increase the defendant’s expected liability beyond the level of harm caused by that particular injurer. That is why Ben-Shahar for example argues in chapter 3 that a proportionate liability rule (in dealing with causal uncertainty) may be superior to an ‘all or nothing’ approach and this both from a deterrence as well as from a fairness perspective.

This shows that to the extent that fairness considerations are not restricted to a rather short-sighted desire to provide victims’ compensation at all costs, but also include other considerations (like not exposing the injurer to more expected losses than he contributed to by his activity) the results of economic analysis in most cases do not diverge strongly from what would be considered fair (in this broader sense).

11 Empirical evidence

A crucial question is of course to what extent the assumptions of economic analysis, for example concerning the preventive effects of the tort system, can be backed up with empirical evidence. The same question also arises for the claim of lawyers that tort law would be suitable as an instrument of victim compensation.

Many contributions provide suggestions in that respect and the empirical literature is moreover summarised in chapter 16 (in part VII ).

Some studies, even though they remain rare, provide empirical evidence of the incentive effects of liability rules. Artigot i Golobardes and Gómez Pomar discuss in chapter 2 a well-known empirical study by White ( 1989 ). This research shows that the incentive to avoid accidents was influenced by the shift from contributory to the comparative negligence rule. Especially for mediocre or bad drivers, the incentive to drive carefully was stronger p. xxxvunder the contributory negligence than under the comparative negligence rule, since under the first rule, the drivers faced higher expected liability. The shift from contributory to comparative negligence therefore reduced drivers’ incentives to increase care. This was also confirmed by other studies. Even though many difficulties exist in measuring the exact effects of a change in a liability rule, Geistfeld shows in chapter 11 that for the area of product liability, there are many studies showing that producer liability reduces the frequency of accidents and that it, moreover, has had a significant impact on product-design decisions.

van Velthoven summarises in chapter 16 many other studies that have all attempted to analyse the safety effects of liability rules. Well-known are studies analysing the effect of leaving the tort system and moving to a no-fault compensation system. van Velthoven holds that (even though there are of course differences) many studies show that the reductions in accident liability produced by no-fault laws lead to an increase in traffic fatalities. Also for other domains than traffic liability, van Velthoven finds evidence that liability rules do affect the behaviour of potential injurers. However, van Velthoven equally shows that it is difficult to interpret the precise consequences of these data. For example, in the area of medical malpractice, he concludes that increasing liability has affected the behaviour of healthcare providers, leading to a decrease in the supply of medical services. To the extent that medical malpractice liability drives some physicians out of the market and makes other healthcare providers defensively adapt the treatment of their patients, this might, so van Velthoven argues, be detrimental to social welfare. This danger of defensive medicine is, however, a specific problem for the area of medical malpractice.

Empirical studies have equally analysed the ability of the tort system to provide adequate compensation. In this respect, Visscher discusses in chapter 6 many studies showing that the amount of tort damages in reality often falls short of the theoretical ideal of full compensation. In this respect, he quotes the many studies summarised in the well-known book by Dewees, Duff and Trebilcock ( 1996 ), who had equally shown the shortcomings of the tort system as far as providing compensation to victims is concerned. Boccara reports in chapter 12 on various studies with respect to medical malpractice showing that there are many so-called false negatives (a true victim should receive compensation but does not) as well as false positives (a patient receives compensation but in fact should not). These weaknesses of the tort system in providing compensation are also confirmed in many studies summarised in chapter 16 by van Velthoven. He quotes for example studies in the medical malpractice area showing that only between 1.5 and 2.5 percent of all victims who suffered injury due to negligence filed a malpractice claim. van Velthoven equally discusses p. xxxviempirical studies showing that average damage awards in product liability or medical malpractice cases are substantially higher ($350,000 to $600,000) than in automobile accident cases ($164,000 in federal and $16,000 in state courts). van Velthoven therefore concludes that a large fraction of valid claims is never filed, but moreover that equally many valid claims that are filed do not get honoured. This, in combination with the fact that compensation awards are often less than what they should be on the basis of economic analysis, leads to the conclusion that the tort system may fail both with respect to its compensatory as well as with respect to its deterrent function.

However, this rather pessimistic conclusion should not immediately lead to arguing in favour of the alternative (safety regulation in compensation with a no-fault compensation scheme). We already indicated that there is an impressive amount of evidence showing the shortcomings of no-fault compensation systems. They are summarised in chapter 14 by Fiore who reports the various studies that show that one dramatic result of the introduction of no-fault compensation system for automobile accidents has been an increase in road fatalities. This also follows from the studies discussed in the contribution by van Velthoven in chapter 16 . Fiore also discusses studies with respect to the New Zealand universal no-fault compensation scheme, introduced in 1974: it has equally led to an increase in injury rates and accidents. Therefore, even though the tort system may not be perfect in providing compensation to victims, the empirical evidence presented in the various contributions (and more particularly in chapter 16 by van Velthoven) seems to indicate that, as far as providing incentives for prevention is concerned, the tort system still does a lot better than the alternatives (such as a no-fault compensation scheme). However, as far as compensation is concerned, alternatives (like the New Zealand no-fault compensation schemes) do better than the tort system.

12 A few challenges

The various contributions contained in this book make clear that the economic analysis of tort has gone through an impressive development: since the early publications of Calabresi, Brown, Posner and Shavell, discussed above, an impressive body of literature has emerged. As a result, important doctrinal issues (like the choice between strict liability and negligence) have been the subject of further refinement and study and the general theory has been applied and refined with respect to particular areas of tort law like environmental liability, product liability or medical malpractice. Moreover, both the general assumptions of economic theory and the functioning of the tort law system with respect to compensation and deterrence have been tested empirically. In that respect, no one can p. xxxviideny that economics has provided powerful insights for tort lawyers. Its theoretical foundations have allowed complicated areas of tort law to be studied and explained and have thus provided the theoretical framework for a better understanding of the functioning of liability rules. Moreover, the empirical research has also allowed a ‘demystification’ of tort law, for example showing that tort law is stronger in its preventive function than in providing compensation.

Yet many challenges remain for this fascinating area of economic analysis of law. One such challenge has been identified by van Boom in chapter 15 and deals more particularly with the question of how insights from the economic analysis of tort can be combined with comparative law. Indeed, many contributors have sketched a variety of different approaches among legal systems, for example as far as the compensation of victims of traffic accidents is concerned, but also as far as compensation for pure economic loss ( chapter 7 ) or non-pecuniary losses ( chapter 8 ) is concerned. The interesting question for a positive analysis is to what extent these varying approaches in legal systems can be explained by differing preferences of the citizens (for example, as far as the demand for compensating pain and suffering is concerned). van Boom makes clear that in some cases, it is not always obvious whether the differences between the tort law systems actually do reflect differing preferences or are merely the result of a path dependency resulting from a development in the particular legal culture. He rightly argues that to some extent lawyers may of course have an interest in keeping differences alive, thus increasing costs for citizens in knowing the contents of the law and increasing the need for legal advice. In addition, the question also arises to what extent the differences which can be observed do reflect varying preferences or differences in legal cultures or are rather the result of pressures by interest groups affected by the tort system. A powerful interest group already mentioned is of course the tort lawyers themselves. In addition, the exposed potential tortfeasors (healthcare providers, manufacturers, enterprises) as well as their insurers may also constitute powerful interest groups that will lobby in favour or against particular tort rules or tort law reforms. Many contributors show that there is ample evidence of interest group influence in legislation with respect to tort law (reform). This is for example obvious in the area of medical malpractice (discussed by Boccara in chapter 12 ) where, not surprisingly, it is healthcare providers that lobby strongly in favour of a no-fault compensation scheme (discussed by Fiore in chapter 14 ), thus limiting their exposure to liability.

A challenge related to this issue is whether differences between tort law systems cannot only be explained positively, but whether it would equally be possible to identify to what extent these differences are normatively p. xxxviiidesirable or not. That question is of course highly relevant where tort law is applied in large federal systems such as Europe or the US. In some areas like product liability for example, the transboundary nature of externalities has often been advanced as an argument in favour of a harmonisation of tort rules at a central level. Some go further, however, and argue that differences between states concerning for example environmental liability may also lead to a race to the bottom (in that particular case towards pollution havens). Others on the other hand argue that an integrated market within a federal system can also function perfectly well with a decentralised tort law. 8 The question is highly relevant since in both the US and Europe tendencies exist towards a further harmonisation of tort rules. These harmonisation attempts are of course based not only on notions of efficiency, but also on fairness considerations, arguing that citizens should for example all receive a similar compensation for non-pecuniary losses. An interesting challenge therefore consists in further examining the consequences of the economics of federalism for the desired degree of harmonisation of tort rules within federal systems. Even if some (economic or other) arguments in favour of (some) centralisation could be formulated, the question still arises what type of rules should be harmonised and what area of tort law can still be decided at the decentralised level.

A second challenge is suggested in the contribution by Schäfer and Müller-Langer ( chapter 1 ) who point at the potential importance of behavioural law and economics for the area of tort law. All the contributions in this book make clear that the economic literature on tort basically starts from the assumption that the potential parties in an accident setting are rational individuals striving for the maximisation of their utility and that they can thus be affected by a finding of liability. Schäfer and Müller-Langer point to the behavioural literature which shows that individuals can be subject to a variety of so-called heuristics and biases as a result of which they may not always act in the way predicted by the rational actor model. An interesting challenge is how this behavioural literature affects the economic analysis of tort law. One question is how these biases affect the choice between strict liability and negligence; another is how biases may equally affect the judiciary. For example, some have pointed to the so-called hindsight bias, being the tendency of a decision maker (the judge) to attach an excessively high probability to an event simply because it ended up occurring (Jolls, Sunstein and Thaler, 1998 ). The question arises as to how this affects the ability of judges to reach a proper negligence p. xxxixdetermination because they are likely to believe that precautions that could have been taken would have been more cost effective than they actually appeared ex ante.

Some attention has been paid to the influence of behavioural biases on the economics of tort law. Teitelbaum ( 2007 ) has paid some attention to this issue, but a real challenge for the economic analysis of accident law is to analyse how (if at all) the traditional models of accident law change under the influence of behavioural insights. The more difficult question is of course whether, if there were to be changes, this should also lead to implications at the normative level, for example as far as the choice of the efficient liability rule is concerned.

A third challenge implicit in many of the contributions to this book is the general point of how on the one hand it is possible to ever further refine economic analysis of tort and on the other hand for it still to remain practical. To put it bluntly: how can the economic analysis of tort on the one hand still evolve towards ever further refinements and on the other hand not lose the lawyers? This is a realistic question for the simple reason that, as many contributions have also shown, economic analysis tends to reach a very high level of abstraction whereby models are increasingly (mathematically) refined but sometimes sight is lost of the question to what extent these further refinements lead to a better understanding of the reality of accident law. Nevertheless, there is no reason to be pessimistic in that respect yet: many contributions show that notwithstanding the strong evolutions in the literature, the result has been that economic models can now predict the effects of various liability rules with greater accuracy, as has been shown by the overview of the empirical material in chapter 16 by van Velthoven. The further refinements also allow economic analysis to provide answers to complex policy questions posed by lawyers. For example, the complex question of how the law should deal with uncertainty over causation, dealt with by Ben-Shahar in chapter 3 , has been dealt with in several economic studies clearly pointing to the superiority of a proportionate liability rule (rather than a so-called all or nothing approach). Interestingly, this economic literature has now influenced the decision making of for example the Supreme Court in the Netherlands which accepted a proportional approach in a March 2006 decision concerning causal uncertainty in the case of an employee who had been exposed to asbestos but was also a heavy smoker and suffered from lung cancer. The real challenge for scholars in economic analysis of tort is to on the one hand indeed continue to refine economic models but on the other hand to still attempt to explain the relevance of these refinements to lawyers so that they can potentially contribute to more sophisticated decision making by the policy maker (legislator or judge).

13 p. xlTopics for further research

In addition to the few challenges just mentioned, there are a few issues explicitly referred to in the contributions to this book on which further research can still be undertaken. Just to mention a few examples: Kraakman points in chapter 5 to the necessity to further address corporate criminal liability and more particularly the desirability of combining the criminal liability of the corporation with the liability of individuals within the corporation. This issue is of particular interest since some literature has pointed to the potentially perverse effects of corporate criminal liability on the incentives of agents within the corporation. The question therefore arises of how an optimal combination of liability by a corporation with the personal liability of agents within that corporation can be achieved, providing optimal incentives to all parties involved.

An equally interesting point for further research pointed at by Visscher in chapter 6 is how the law of damages, more particularly in Europe, could be reformed in such a way that the compensation awarded in tort law, especially in the case of fatal accidents, would be more in line with economic analysis. That question is more pertinent since refined systems for valuing statistical life (such as Quality Adjusted Life Years – QUALY) have been developed. The practice of compensation (also of non-pecuniary losses) in reality is often much lower than what is proposed by these economic models. The question therefore arises whether it is possible to reform the law of damages in such a way that the current undercompensation (more particularly in case of fatal accidents) can be reduced.

An important topic for further research related to the comparative tort law and economics mentioned under the challenges above is of course to what extent differences observed between legal systems can be explained by using economic analysis. The topics of the compensation for pure economic loss (discussed by De Mot in chapter 7 ) or non-pecuniary losses (discussed by Lindenbergh and Kippersluis in chapter 8 ) are interesting examples in that respect. Again, as mentioned above, it would be interesting to analyse in those particular domains whether the observed differences can be explained and/or supported on economic grounds.

Finally, a central topic for further research, mostly following from van Velthoven’s interesting chapter 16 presenting empirical evidence, is of course what the precise function of the tort system should be. The empirical evidence seems to indicate (of course depending upon the area and the empirical studies involved) that the tort system does provide incentives for prevention. This could constitute an important argument in favour of retaining the tort system. However, the studies summarised by Van Velthoven in chapter 16 equally show that the tort system does relatively poorly as far as compensation is concerned: only a small fraction of p. xlivictims actually receives compensation from the tort system and moreover the question can be asked whether compensation through the tort system is adequate. Many have therefore examined whether alternatives (such as insurance discussed in chapter 13 or no-fault compensation discussed in chapter 14 ) can be advanced to provide compensation to victims and thus remedy this weakness of the tort system. However, the empirical evidence equally shows that to the extent that these alternatives replace the tort system and thereby dilute the deterrent effect of the tort system, the accident rate actually increases. An important general point for further research remains therefore whether it is possible to work out an alternative to the tort system that provides adequate compensation to victims (which the tort system is apparently not able to do), but at the same time keeping the incentive function of the tort system. Empirical evidence of attempts to do this (like the introduction of a no-fault system) show that alternatives that lead to more compensation usually have negative effects as far as prevention is concerned. An interesting point for further research therefore remains whether it is possible to work out an alternative that on the one hand provides better compensation and on the other hand still provides adequate incentives for prevention to potential tortfeasors as well.

14 Word of thanks

I owe thanks to the many contributors for their willingness either to update their contribution to the 2000 Encyclopedia or to contribute entirely new chapters to this volume. Thanks to the willingness of these contributors, we have been able to provide an impressive overview showing the richness of the literature in this domain of the economic analysis of tort. I owe special thanks to the general editor of this Encyclopedia, Gerrit de Geest, for his encouragement and stimulating suggestions.

I owe special thanks to Franziska Weber (Maastricht) for useful research assistance and for reviewing the footnotes and referencing. Yleen Simonis of the secretariat of the Maastricht European Institute for Transnational Legal Research (METRO) provided editorial assistance in the preparation of this book for publication. Finally, I am, as always, very grateful to Edward Elgar for professional and effective support in the publication of this volume.

The texts were finalised in March 2008, so that developments after that date could not be taken into account.

Michael Faure

Maastricht-Rotterdam, June 2008

Calabresi ( 1970 , 17).

Calabresi ( 1970 , 18).

They more particularly refer to Bar-Gill and Ben-Shahar ( 2003 ).

So more particularly Arlen ( 1994 ).

Calabresi ( 1965 ).

This is also stressed by Fiore in chapter 14 when dealing with no-fault compensation systems.

Some of these issues have recently been addressed by Van Boom, Lukas and Kissling ( 2007 ).

See in that respect inter alia Van den Bergh and Visscher ( 2006 ).

p. xliiReferences