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Getting Incentives Right

Getting Incentives Right: Improving Torts, Contracts, and Restitution

Robert D. Cooter
Ariel Porat
Copyright Date: 2014
Pages: 224
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  • Book Info
    Getting Incentives Right
    Book Description:

    Lawyers, judges, and scholars have long debated whether incentives in tort, contract, and restitution law effectively promote the welfare of society. If these incentives were ideal, tort law would reduce the cost and frequency of accidents, contract law would lubricate transactions, and restitution law would encourage people to benefit others. Unfortunately, the incentives in these laws lead to too many injuries, too little contractual cooperation, and too few unrequested benefits.Getting Incentives Rightexplains how law might better serve the social good.

    In tort law, Robert Cooter and Ariel Porat propose that all foreseeable risks should be included when setting standards of care and awarding damages. Failure to do so causes accidents that better legal incentives would avoid. In contract law, they show that making a promise often causes the person who receives it to change behavior and undermine the cooperation between the parties. They recommend several solutions, including a novel contract called "anti-insurance." In restitution law, people who convey unrequested benefits to others are seldom entitled to compensation. Restitution law should compensate them more than it currently does, so that they will provide more unrequested benefits. In these three areas of law,Getting Incentives Rightdemonstrates that better law can promote the well-being of people by providing better incentives for the private regulation of conduct.

    eISBN: 978-1-4008-5039-6
    Subjects: Law, Economics

Table of Contents

  1. Front Matter
    (pp. i-iv)
  2. Table of Contents
    (pp. v-vi)
  3. Acknowledgments
    (pp. vii-viii)
  4. Introduction
    (pp. 1-12)

    Law should promote the wellbeing of people. Tort law, which deals with accidents, should reduce their cost and frequency—an important matter, as accidents cause approximately 42 million hospital visits and 182 thousand deaths per year in the United States.¹ Contract law, called upon in a range of activities from renting an apartment to buying an oil field, should lubricate these transactions. Transactions based on contract law generate approximately fifteen trillion dollars of national income annually in the United States.² Restitution law, which mostly discourages people from using what belongs to others without their consent, should encourage people to supply...

  5. I. Torts and Misalignments

    • [I Introduction]
      (pp. 13-16)

      Courts typically determine tort liability in two stages. First the court decides whether the defendant behaved wrongfully and caused the harm suffered by the plaintiff. If the court decides affirmatively, it proceeds to the second stage and decides on the amount of damages to award. When negligence is alleged in the first stage, courts often apply the Learned Hand formula to determine whether or not the defendant was in fact negligent. Under this formula, a defendant is considered negligent, and therefore liable for the harm his negligence caused, if and only if the cost of precautions that he failed to...

    • 1 Prices, Sanctions, and Discontinuities
      (pp. 17-31)

      A city reduces parking congestion in the downtown by maintaining a parking lot where cars pay by the hour. A rational driver will stay parked so long as an extra hour is worth more to him than the price. As soon as staying another hour is worth less than the price, the driver will leave the parking lot. This example suggests that a price is usually a payment of money that is required in order to do what is permitted. A price allows the individual to choose what to do as long as he pays it. The rational individual equates...

    • 2 The Injurer’s Self-Risk Puzzle
      (pp. 32-46)

      In economics, “joint product” refers to two goods unavoidably bundled in a production process, like wool and mutton from raising sheep. Similarly, “joint risk” refers to an activity that unavoidably bundles risks to the actor (self-risk) and nonactors (other-risk). For example, driving a car imposes joint risk on the driver and other people. Safety standards should balance the burden of precaution against reduction in all risks, including self-risk and other-risk. Unfortunately, courts often decide liability based on the injurer’s risk to others and not the risk to himself. These legal decisions make no sense morally or economically. These decisions cause...

    • 3 Negligence Per Se and Unaccounted Risks
      (pp. 47-60)

      When a statute imposes a duty of care, courts presume that its breach is “negligence per se.”¹ If the breach causes harm, courts allow recovery of damages by some victims and not others, or courts allow recovery for some injuries and not others. Unfortunately, courts often draw the wrong boundary. An example adapted from the new Restatement (Third) of Torts: Liability for Physical and Emotional Harm illustrates the problem:²

      Example 1: The Stairway Railing.A statute requires employers to install railings alongside stairways at the workplace if they have five or more disabled employees. An employer who has five disabled...

    • 4 Lapses and Substitution
      (pp. 61-73)

      The making and execution of decisions can go wrong and result in harm in various ways. The harm caused can be attributed to misjudged distances, underestimated probabilities, unforeseen consequences, quavering hands, clumsy feet, slips of the tongue, or an eye’s blink—among endless other possibilities. Given the chance that such lapses will occur, actors cannot simply choose a specific level of precaution. Instead, they draw their precaution from a probability distribution. Here is an example.

      Example 1: Driver’s Lapse.A motorist sets out on the long, straight drive from San Francisco to Los Angeles on Interstate 5. The speed limit...

    • 5 Total Liability for Excessive Harm
      (pp. 74-88)

      When several factories pollute a lake, officials may be able to measure the total pollution but not the individual pollution emitted by each factory. In these circumstances, total pollution is verifiable and individual pollution is unverifiable. Implementing a rule of strict liability or negligence in tort law requires verifying the emissions of each factory and the resulting harm. Similarly, a fine for excessive emissions, a pollution tax (“Pigouvian tax”), or transferable pollution rights also require verifying emissions of each factory. Traditional approaches to liability do not work when individual behavior is unverifiable, because officials cannot prove how much harm any...

  6. II. Contracts and Victims’ Incentives

    • [II Introduction]
      (pp. 89-91)

      A contract changes the incentives of the promisor who makes a promise and the promisee who receives it. You might expect that theories of contract law would analyze the incentives of both parties. Surprisingly, however, contract theories focus mostly on the promisor’s incentives. The promisee’s incentives are commonly ignored as if she were passive and unable to advance the contract’s purposes. In fact, the promisee can often affect the probability and value of performance and breach in at least three ways.¹ First, the promisee’srelianceon the promise increases the gain from performance and the loss from breach. Second, promisee’s...

    • 6 Unity in the Law of Torts and Contracts
      (pp. 92-104)

      Variables in an economic model can be redefined and the model repurposed, in a process similar to recycling aluminum. The hard work of analysis transfers from one topic to another, revealing unity in complexity. This chapter repurposes the model of torts. In the basic torts model, the injurer and the victim can reduce the probability and severity of accidents by taking precaution. “Precaution” against accidents can be reinterpreted to fit contracts and other bodies of law.¹ For contracts, precaution is reinterpreted as effort to fulfill a promise and avoid breaching a contract. By allocating the cost of harm from accidents...

    • 7 Anti-Insurance
      (pp. 105-127)

      Distrust defeats many business deals like this one.

      Example 1: Warranty for Transmission on Used Car.Buyer offers to buy a used car from seller, provided that seller repairs the transmission and provides a one-year warranty (a promise to pay for replacing the transmission if it fails within one year). Seller replies that Buyer might abuse a warranted transmission by racing the car. Buyer proposes that abuse of the transmission should void the warranty. Seller rejects this proposal as useless because he could not prove Buyer’s abuse. Seller offers a three-month warranty, Buyer rejects the offer, and no sale occurs....

    • 8 Decreasing Liability Contracts and the Assistant Interest
      (pp. 128-148)

      The anti-insurance contract discussed in the preceding chapter solves a basic incentive problem that we call the paradox of compensation, but, alas, anti-insurance is unavailable in the market. existing contractual forms sometimes mitigate the compensation paradox, notably in contracts whose performance occurs in phases. In phased contracts, the promisor sinks more expenditure into performance as time passes and less expenditure remains. Consider this example:

      Example1: Promisor’s Sunk Costs.Buyer and Developer make a contract in which Buyer immediately pays Developer 90 for the latter’s promise to construct a building that Buyer values at 100. Developer spends 40 on architectural drawings...

  7. III. Restitution and Positive Externalities

    • [III Introduction]
      (pp. 149-150)

      The third claim in this book is that the law should compensate for unrequested benefits more often in order to induce people to provide more of them.

      Suppose that your neighbor intentionally broke some boards on your fence in order to get a better view from his porch. Under current law, your neighbor must compensate you for the resulting harm. Alternatively, suppose that vandals broke some boards on your fence and your neighbor repaired it. Your neighbor, who wanted to keep the dogs from ruining your flowers, did not obtain your consent because you were unreachable while traveling abroad. When...

    • 9 A Public Goods Theory of Restitution
      (pp. 151-164)

      Why do public places have so much litter and so few roses? The law has a lot to do with it. Someone who picks up litter on the sidewalk or plants roses in public view benefits others. The law seldom rewards an individual who creates an unrequested benefit for others. So private production of public goods is deficient.

      To understand the problem, consider some examples where law gives or withholds rewards for unrequested benefits to others.

      Example 1: Heirs to Estate.Five heirs will divide equally the estate of a deceased person. A debtor owes 20 to the estate. one...

    • 10 Liability Externalities and Mandatory Choices
      (pp. 165-186)

      “Externality” usually means costs and benefits conveyed to others that market prices do not capture. When markets fail to capture the cost of harm that one actor causes to another, liability law often improves the situation by making injurers compensate victims. sometimes, however, liability law leaves significant costs externalized. “Liability externality” is our phrase for costs and benefits conveyed to others that market prices do not capture and liability law does not correct. In these circumstances, adjusting liability can improve incentives, as in this example.

      Example 1: Liability Externality.A driver negligently breaks a pedestrian’s leg, and a doctor negligently...

    • 11 The Relationship between Nonlegal Sanctions and Damages
      (pp. 187-206)

      A driver has a moral and a legal obligation to drive carefully, and a contractor has a moral and a legal obligation to keep his promises. As with driving and contracting, social and legal norms often regulate the same behavior. A wrongdoer who violates the norm may suffer a nonlegal sanction such as damage to reputation, and he may suffer a legal sanction such as liability. When morality and private law align, the total sanction suffered by the wrongdoer equals the nonlegal sanction plus damages. This fact poses a question that remains mostly unexplored in legal theory. Courts typically set...

  8. Conclusion
    (pp. 207-210)

    This book makes three central claims, each developed in a separate part and each related to a different branch of private law.First, to achieve efficiency under negligence law, all foreseeable risks should be included when setting standards of care and awarding damage.In several important areas of law, however, courts disregard or miscalculate some risks, so standards of care misalign with liability for damages in important ways. Because of this misalignment, courts systematically exclude reduction in the injurer’s risk to himself when considering the benefits of precaution by an injurer, so the legal standard of care is set too...

  9. Table of Cases
    (pp. 211-212)
  10. Table of Books and Articles
    (pp. 213-219)
  11. Subject Index
    (pp. 220-232)