Econ 522 Economics of Law

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Econ 522Economics of Law
Dan Quint Spring 2013 Lecture 21
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Whats a lifeworth?
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Whats a life worth?

• Assessing damages in a wrongful death lawsuit
  requires some notion of what a life is worth
• Safety regulators also need some notion of what a
  life is worth
• Kip Viscusi, The Value of Risks to Life and
  Health
• Regulators need to decide where to draw the line

Estimated cost per life saved
Regulation
200,000
Airplane cabin fire protection
1,300,000
Car side door protection standards
89,300,000
OSHA asbestos regulations
104,200,000
EPA asbestos regulations
72,000,000,000
Proposed OSHA formaldehyde standard
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Kip Viscusi, The Value of Risks to Life and Health

• Let w be starting wealth, p probability of death
• There might be some amount of money M such that
• Breaks down when p 1 not because cant equate
  death with compensation, but because second term
  vanishes
• If we can find M, we can solve for u(death)!
• Ask a bunch of people how much money they would
  need to take a 1/1000 chance of death?
• Do a lab experiment where you expose people to a
  risk of death?
• Better idea impute how much compensation people
  require from the real-life choices they make

p u(death)
(1 p) u(wM)
u(w)
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Kip Viscusi, The Value of Risks to Life and Health

• Lots of day-to-day choices increase or decrease
  our risk of death
• Choose between Volvo and sports car with
  fiberglass body
• Take a job washing skyscraper windows, or office
  job that pays less
• Buy smoke detectors and fire extinguishers, or
  dont
• Hand Rule Damages
• Hand Rule precaution is cost-justified if
• cost of precaution lt reduction in accidents X
  cost of accident
• Suppose side-curtain airbags reduce risk of fatal
  accident by 1/1000
• If someone pays 1,000 extra for a car with
  side-curtain airbags, it must mean that
• 1,000 lt 1/1000 value of their life
• or, implicitly, they value their life more than
  1,000,000

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Kip Viscusi, The Value of Risks to Life and Health

• Viscusi surveys lots of existing studies which
  impute value of life from peoples decisions
• Many use wage differentials
• How much higher are wages for risky jobs compared
  to safe jobs?
• Others look at
• Decisions to speed, wear seatbelts, buy smoke
  detectors, smoke cigarettes
• Decision to live in very polluted areas
  (comparing property values)
• Prices of newer, safer cars versus older, more
  dangerous ones
• Some used surveys to ask how people would make
  tradeoffs between money and safety
• Each paper reaches some estimate for implicit
  value people attach to their lives

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What does Viscusi find?
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What does Viscusi find?24 studies based on wage
differentials
Implicitvalueof life
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What does Viscusi find?7 studies using other
risk-money tradeoffs
Implicit Value of life( millions)
Component of theMonetary Tradeoff
Nature of Risk,Year
0.07
Value of driver time based on wage rates
Highway speed-related accident risk, 1973
1.2
Estimated disutility of seat belts
Automobile death risks, 1972
0.6
Purchase price of smoke detectors
Fire fatality risks without smoke detectors,
1974-1979
0.8
Property values in Allegheny Co., PA
Mortality effects of air pollution, 1978
0.7
Estimated monetary equivalent of effect of risk
info
Cigarette smoking risks, 1980
2.0
Purchase price of smoke detector
Fire fatality risks without smoke detectors,
1968-1985
4.0
Prices of new automobiles
Automobile accident risks, 1986
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What does Viscusi find?6 studies based on surveys
Implicit Value of Life ( millions)
SurveyMethodology
Nature ofRisk
0.1
Willingness to pay question, door-to-door small
(36) Boston sample
Improved ambulance service, post-heart attack
lives
15.6
Mail survey willingness to accept increased risk,
small (30) U.K. sample, 1975
Airline safety and locational life expectancy
risks
3.4 (pay),8.8 (accept)
Willingness to pay, willingness to accept change
in job risk in mail survey, 1984
Job fatality risk
3.8
Willingness to pay for risk reduction, U.K.
survey, 1982
Motor vehicle accidents
2.7 (median)9.7 (mean)
Interactive computer program with pairwise auto
risk-living cost tradeoffs until indifference
achieved, 1987
Automobile accident risks
1.2
Series of contingent valuation questions, New
Zealand survey, 1989-1990
Traffic safety
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What does Viscusi find?

• Wide range of results
• Most suggest value of life between 1,000,000 and
  10,000,000
• Many clustered between 3,000,000 and 7,000,000
• Even with wide range, he argues this is very
  useful
• In practice, value-of-life debates seldom focus
  on whether the appropriate value of life should
  be 3 or 4 million
• However, the estimates do provide guidance as to
  whether risk reduction efforts that cost 50,000
  per life saved or 50 million per life saved are
  warranted.
• The threshold for the Office of Management and
  Budget to be successful in rejecting proposed
  risk regulations has been in excess of 100
  million.
• CU NHTSA uses 2.5 million for value of traffic
  fatality
• Current EPA 9.1 MM, FDA 7.9 MM, Transpo Dept
  6 MM

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More twistson liability
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Vicarious Liability

• Vicarious liability is when one person is held
  liablefor harm caused by another
• Parents may be liable for harm caused by their
  child
• Employer may be liable for harm caused by
  employee
• Respondeat superior let the master answer
• Employer is liable for torts of employee if
  employee was acting within the scope of his
  employment

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Vicarious Liability

• Gives employers incentive to...
• be more careful who they hire
• be more careful what they assign employees to do
• supervise employees more carefully
• Employers may be better able to make these
  decisions than employees
• and employees may be judgment-proof

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Vicarious Liability

• Vicarious liability can be implemented through
• Strict liability rule employer liable for any
  harm caused by employee (as long as employee was
  acting within scope of employment)
• Negligence rule employer is only liable if he
  was negligent in supervising employee
• Which is better? It depends.
• If proving negligent supervision is too hard,
  strict vicarious liability might work better
• But an example favoring negligent vicarious
  liability

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Joint and Several Liability

• Suppose you were harmed by accident caused by two
  injurers
• Joint liability you can sue them both together
• Several liability you can sue each one
  separately
• Several liability with contribution each is only
  liable for his share of damage
• Joint and several liability you can sue either
  one for the full amount of the harm
• Joint and several liability with contribution
  the one you sued could then sue his friend to get
  back half his money

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Joint and Several Liability

• Joint and several liability holds under common
  law when
• Defendants acted together to cause the harm, or
• Harm was indivisible (impossible to tell who was
  at fault)
• Good for the victim, because
• No need to prove exactly who caused harm
• Greater chance of collecting full level of
  damages
• Instead of suing person most responsible, could
  sue person most likely to be able to pay

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Punitivedamages
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Inconsistency of damages

• Damage awards vary greatly across countries, even
  across individual cases
• We saw last week
• As long as damages are correct on average, random
  inconsistency doesnt affect incentives (under
  either strict liability or negligence)
• But, if appropriate level of damages isnt
  well-established, more incentive to spend more
  fighting

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One problem with inconsistent damages more
incentive to fight hard

• Example each side can hire cheap lawyer or
  expensive lawyer
• Cheap lawyer costs 10, expensive lawyer costs
  45
• If two lawyers are equally good, expected
  judgment is 100
• If one is better, expected judgment is doubled or
  halved

Defendant
Cheap
Expensive
90, -110
40, -95
Cheap Lawyer
Plaintiff
155, -210
55, -145
Expensive Lawyer
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Punitive damages

• What weve discussed so far compensatory damages
• Meant to make victim whole/compensate for
  actual damage done
• In addition, courts sometimes award punitive
  damages
• Additional damages meant to punish injurer
• Create stronger incentive to avoid initial harm
• Punitive damages generally not awarded for
  innocent mistakes, but may be used when injurers
  behavior was
• malicious, oppressive, gross, willful and
  wanton, or fraudulent

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Punitive damages

• Calculation of punitive damages even less
  well-defined than compensatory damages
• Level of punitive damages supposed to bear
  reasonable relationship to level of
  compensatory damages
• Not clear exactly what this means
• U.S. Supreme Court punitive damages more than
  ten times compensatory damages will attract
  close scrutiny, but not explicitly ruled out

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Example of punitive damages Liebeck v McDonalds
(1994) (the coffee cup case)

• Stella Liebeck was badly burned when she spilled
  a cup of McDonalds coffee in her lap
• Awarded 160,000 in compensatory damages, plus
  2.9 million in punitive damages
• Case became poster child for excessive damages,
  but

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Liebeck v McDonalds (1994)

• Stella Liebeck dumped coffee in her lap while
  adding cream/sugar
• Third degree burns, 8 days in hospital, skin
  grafts, 2 years treatment
• Initially sued for 20,000, mostly for medical
  costs
• McDonalds offered to settle for 800
• McDonalds serves coffee at 180-190 degrees
• At 180 degrees, coffee can cause a third-degree
  burn requiring skin grafts in 12-15 seconds
• Lower temperature would increase length of
  exposure necessary
• McDonalds had received 700 prior complaints of
  burns, and had settled with some of the victims
• Quality control manager testified that 700
  complaints, given how many cups of coffee
  McDonalds serves, was not sufficient for
  McDonalds to reexamine practices

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Liebeck v McDonalds (1994)

• Rule in place was comparative negligence
• Jury found both parties negligent, McDonalds 80
  responsible
• Calculated compensatory damages of 200,000
• times 80 gives 160,000
• Added 2.9 million in punitive damages
• Judge reduced punitive damages to 3X
  compensatory, making total damages 640,000
• During appeal, parties settled out of court for
  some smaller amount
• Jury seemed to be using punitive damages to
  punish McDonalds for being arrogant and uncaring

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What is the economic purpose of punitive damages?

• Weve said all along with perfect compensation,
  incentives for injurer are set correctly. So why
  punitive damages?
• Example
• Suppose manufacturer can eliminate 10 accidents a
  year, each causing 1,000 in damages, for 9,000
• Clearly efficient
• If every accident victim would sue and win,
  company has incentive to take this precaution
• But if some wont, then not enough incentive
• Suppose only half the victims will bring
  successful lawsuits
• Compensatory damages would be 5,000 company is
  better off paying that then taking efficient
  precaution
• One way to fix this award higher damages in the
  cases that are brought

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This suggests

• Punitive damages should be related to
  compensatory damages, but higher the more likely
  injurer is to get away with it
• If 50 of accidents will lead to successful
  lawsuits, total damages should be 2 X harm
• Which requires punitive damages compensatory
  damages
• If 10 of accidents lead to awards, damages
  should be 10 X harm
• So punitive damages should be 9 X compensatory
  damages
• Seems most appropriate when injurers actions
  were deliberately fraudulent, since may have been
  based on cost-benefit analysis of chance of being
  caught

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Some empirical observations about tort system in
the U.S.(might not get to)
Skip
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U.S. tort system

• In 1990s, tort cases passed contract cases as
  most common form of lawsuit
• Most handled at state level in 1994, 41,000 tort
  cases resolved in federal courts, 378,000 in
  state courts in largest 75 counties
• Most involve a single plaintiff (many contract
  cases involve multiple plaintiffs)
• Among tort cases in 75 largest U.S. counties
• 60 were auto accidents
• 17 were premises liability (slip-and-fall in
  restaurants, businesses, government offices,
  etc.)
• 5 were medical malpractice
• 3 were product liability

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U.S. tort system

• Punitive damages historically very rare
• 1965-1990, punitive damages in product liability
  cases were awarded 353 times
• Average damage award was 625,000, reduced to
  135,000 on appeal
• Average punitive damages only slightly higher
  than compensatory
• In many states, punitive damages limited, or
  require higher standard of evidence
• Civil suits generally require preponderance of
  evidence
• In many states, punitive damages require clear
  and convincing evidence

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U.S. tort system

• Medical malpractice
• New York study in 1980s 1 of hospital
  admissions involved serious injury due to
  negligent care
• Some estimates 5 of total health care costs are
  defensive medicine procedures undertaken
  purely to prevent lawsuits
• Some states have considered caps on damages for
  medical malpractice

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U.S. tort system

• Product liability
• Recent survey of CEOs liability concerns caused
  47 of those surveyed to drop one or more product
  lines, 25 to stop some research and development,
  and 39 to cancel plans for a new product.
• Liability standard for product-related accidents
  is strict products liability
• Manufacturer is liable if product determined to
  be defective
• Defect in design
• Defect in manufacture
• Defect in warning

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Vaccines

• Most vaccines are weakened version of disease
  itself
• Make you much less likely to acquire the disease
• But often come with very small chance of
  contracting disease directly from vaccine
• Salk polio vaccine wiped out polio, but caused 1
  in 4,000,000 people vaccinated to contract polio
• 1974 case established maker had to warn about
  risk
• Since then, some people were awarded damages
  after their children developed polio from vaccine
• If liability cant be avoided, built into cost of
  the drug
• And discourages companies from developing vaccines

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Mass torts

• Since health risks of asbestos understood, over
  600,000 people have brought lawsuits against
  6,000 defendants
• DES (drug administered to pregnant women in
  1950s)
• Impossible to establish which firm produced dose
  given to a particular woman
• California Supreme Court introduced market share
  liability
• Class action lawsuit
• Small, dispersed harms no plaintiff might find
  it worthwhile to sue
• Class action suits allow large lawsuits with lots
  of plaintiffs
• Give more incentive for precaution against
  diffuse harms
• But

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Cooter and Ulens overall assessment of U.S. tort
system

• Critics claim juries routinely hand out excessive
  awards and tort system is out of control
• but actually it functions reasonably well
• Outside of occasional, well-publicized outliers,
  damage awards are generally reasonable
• and liability has led to decreases in accidents
  in many industries

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My favorite problemfrom an old exam
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To wrap up tort law, a funny story from Friedman
A tort plaintiff succeeded in collecting a
large damage judgment. The defendants
attorney, confident that the claimed injury was
bogus, went over to the plaintiff after the
trial and warned him that if he was ever seen
out of his wheelchair he would be back in court
on a charge of fraud. The plaintiff replied
that to save the lawyer the cost of having him
followed, he would be happy to describe his
travel plans. He reached into his pocket and
drew out an airline ticket to Lourdes, the
site of a Catholic shrine famous for miracles.