Keith N. Hylton

THE INFLUENCE OF LITIGATION COSTS ON DETERRENCE UNDER STRICT LIABILITY AND UNDER NEGLIGENCE

This paper examines the influence of litigation costs on deterrence under strict liability and under negligence. By deterrence, I refer to the effect of the threat of liability on the care exercised by potential injurers.’ More precisely, this paper takes litigation costs as given and examines the social desirability of the levels of care exercised under negligence and under strict liability.2 The relationship of this paper to the existing literature examining the influence of litigation costs on incentives under a liability system can best be described by comparing its focus to two fairly recent papers.’ Shave11 (1982) examines whether plaintiffs bring suit when bringing suit is socially desirable in a regime in which litigation is costly. Polinsky and Rubinfeld (1988) examine whether the level of liability is socially optimal in a regime in which litigation is costly. This paper examines whether the level of care is socially optimal in a regime in which litigation is costly. The major result presented in this paper is that strict liability leads to underdeterrence when litigation costs are taken into account. The intuition behind this conclusion is straightforward. Optimal deterrence requires that all external costs resulting from the injurer’s failure to take care be “internalized” to the injurer. But if litigation is costly, two types of external cost will not be internalized under strict liability: the litigation cost “imposed” on victims who choose to sue; and the losses suffered by victims who choose not to sue because the cost of litigating exceeds the anticipated damage award. The negligence rule also leads to underdeterrence when litigation costs are taken into account. Specifically, if agents have rational expectations and the jury is perfectly informed, then in equilibrium a negligence regime must underdeter. The

An Asymmetric Information Model of Litigation

This paper presents a cradle-to-grave model of tort liability, incorporating the decision to comply with the due-care standard, the decision to file suit, and the decision to settle. I use the model primarily to examine settlement rates, plaintiff win rates, and compliance with the due-care standard. The key results of the model are as follows: (1) litigation to judgment occurs only when some but not all actors comply with the due-care standard, and (2) if defendants have the information advantage at trial, plaintiff win rates generally will be less than fifty percent. I apply the model and its simulation results to several empirical issues in the litigation literature. The model simulation indicates that the British rule for allocating legal costs is superior to alternatives in terms of social welfare. In addition, the model is capable of explaining several empirical features of litigation and puzzles in the literature on trial outcomes.

Optimal Law Enforcement and Victim Precaution

In this I article derive the relationship between the optimal penalty and the probability of apprehension when victim precaution is taken into account. I show that in the area of intentional offenses, the optimal penalty is less than the level that internalizes the victims harm plus the states cost of enforcement.

Agreements to Waive or to Arbitrate Legal Claims: An Economic Analysis

As arbitration agreements have grown in use, they have become controversial, with many critics describing them as a disguised form of waiver. This paper presents an economic analysis of waiver and arbitration agreements and applies this analysis to the evolving arbitration case law in the Supreme Court and elsewhere. The paper examines the conditions under which parties have an incentive to enter into these types of agreement, and their welfare implications. It shows that, if parties are well informed, they will enter into waiver agreements when and only when litigation is socially undesirable, in the sense that the deterrence benefits provided by the threat of litigation fall short of litigation costs. Under similar conditions, they will enter into arbitration agreements when and only when the margin between deterrence benefits and dispute resolution costs is larger under the arbitral regime. These results suggest a presumption in favor of enforcing these agreements, especially where parties are informed. Exceptions to this presumption largely should be based on informational disparities. The theory developed in the paper is used to critically examine arguments against arbitration contracts, such as the claim that these agreements inhibit the development of new law, and to suggest a positive theory of the case law. Although the focus here is on waiver and arbitration agreements, the analysis has broader implications for the literature on the social desirability of litigation. The key implication is that the answer to socially undesirable litigation is not a wholesale reduction in the amount of litigation or the number of lawyers, but an expansion of markets in waiver and arbitration agreements.

A Public Choice Theory of Criminal Procedure

In this paper we provide an economic justification for the pro-defendant bias in American Criminal Procedure that we argue paints a more complete picture of the extent and breadth of these pro-defendant procedures than the most commonly forwarded justifications to date. The most commonly forwarded rationale for the pro-defendant bias in American Criminal Procedure is that the costs associated with false convictions (i.e., sanctioning and deterrence costs associated with the erroneous imposition of criminal sanctions) are greater than the costs associated with false acquittals. We argue that on closer inspection this rationale does not justify the extent of our pro-defendant criminal procedures. We offer another justification for these protections: to constrain the costs associated with abuses of prosecutorial or governmental authority. In a nutshell, our claim is that these procedural protections make it more costly for self-interested actors, whether individuals or government enforcement agents, to use the criminal process to obtain their own ends. Such protections help to reduce the rent-seeking and deterrence costs associated with abuses of prosecutorial or governmental authority in the criminal sphere. The theory developed here explains several key institutional features of American Criminal Procedure and provides a positive theory of the case law as well. The theory is also corroborated by empirical evidence on corruption from several countries.In this paper we provide a justification for the pro-defendant bias in American Criminal Procedure that we argue paints a more complete picture of the extent and breadth of these pro-defendant procedures than the most commonly forwarded justifications to date. The most commonly forwarded rationale for the pro-defendant bias in American Criminal Procedure is that the costs associated with false convictions (i.e., sanctioning and deterrence costs associated with erroneous imposition of nonmonetary or criminal sanctions) are greater than the costs associated with false acquittals. We argue that on closer inspection this rationale does not, by itself, justify the extent of our pro-defendant criminal procedures. We offer another justification for these protections – to constrain the costs associated with abuses of prosecutorial or governmental authority. In a nutshell, our claim is that these procedural protections make it more costly for self-interested actors, whether individuals or government enforcement agents, to use the criminal process to obtain their own ends. The theory developed here explains several key institutional features of American Criminal Procedure and provides a positive theory of the case law as well. † Professor of Law, Boston University School of Law; J.D., Harvard Law School; Ph.D. (Economics), M.I.T. †† Visiting Associate Professor of Law, Harvard Law School; Associate Professor of Law, Boston University School of Law; S.J.D Harvard Law School. Toward an Economic Theory of Pro-Defendant Criminal Procedure 1 TOWARD AN ECONOMIC THEORY OF PRO-DEFENDANT CRIMINAL PROCEDURE By: Keith N. Hylton† & Vikramaditya S. Khanna† †

The Theory of Penalties and the Economics of Criminal Law

This paper presents a model of penalties that reconciles the conflicting accounts of optimal punishment by Becker, who argued penalties should internalize social costs, and Posner, who suggested penalties should completely deter offenses. The model delivers specific recommendations as to when penalties should be set to internalize social costs and when they should be set to completely deter offensive conduct. One basic recommendation is that whenever the cost of transacting with respect to some entitlement is less than the cost of enforcing the right to that entitlement, penalties should be set to completely deter. I use the model to generate a positive account of the function and scope of criminal law doctrines, such as intent, necessity, and rules governing the distinction between torts and crimes. The model is also consistent with the history of criminal penalties set out by Adam Smith.

The Economics of Third-Party Financed Litigation

This paper examines the law and economics of third-party financed litigation. I explore the conditions under which a system of third-party financiers and litigators can enhance social welfare, and the conditions under which it is likely to reduce social welfare. Among the applications I consider are the sale of legal rights (such as contingent tort claims) to insurers, to patent trolls, and to financiers generally.

Negligence, Causation, and Incentives for Care

We present a new model of negligence and causation and examine the influence of the negligence test, in the presence of intervening causation, on the level of care. In this model, the injurer’s decision to take care reduces the likelihood of an accident only in the event that some nondeterministic intervention occurs. The effects of the negligence test depend on the information available to the court, and the manner in which the test is implemented. The key effect of the negligence test, in the presence of intervening causation, is to induce actors to take into account the distribution of the intervention probability as well as its expected value. In the most plausible scenario – where courts have limited information – the test generally leads to socially excessive care.

Duty in Tort Law: An Economic Approach

Theories of tort law have focused on the breach and causation components of negligence, saying little if anything about duty. This paper provides a positive economic theory of duty doctrine. The theory that best explains duty doctrines in tort law is the same as the theory that explains strict liability doctrine. The core function of both sets of doctrines is to regulate the frequency or scale of activities that have substantial external effects. Strict liability aims to suppress or tax activities that carry unusually large external costs. Duty doctrines, especially those relieving actors of a duty of care, serve several functions, but one important class encourages or subsidizes activities that carry substantial external benefits. Another class of duty-relieving doctrines serves as complements to property rules. Still another class of duty-relieving doctrines serves to permit markets to function without distortions created by liability.

Trial Selection Theory: A Unified Model

This paper provides a formal model of the trial selection process that incorporates the Priest-Klein hypothesis and alternative theories of selection. We derive the conditions under which the hypothesis is valid, and examine implications for the relationship between trial outcome uncertainty and litigation. The model suggests a generalization of the hypothesis.