Punitive Damages and Deterrence of Efficiency-Promoting Analysis: A Problem without a Solution?

By Garber, Steven | Stanford Law Review, July 2000 | Go to article overview
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Punitive Damages and Deterrence of Efficiency-Promoting Analysis: A Problem without a Solution?


Garber, Steven, Stanford Law Review


I. INTRODUCTION

Professor Viscusi addresses an important concern, namely, that economic efficiency can be undermined by the threat of punitive damages because of a well-executed, socially oriented risk or benefit-cost analysis.(1) While Viscusi refers occasionally to environmental liability, his analysis focuses on product liability, so my comments pertain only to product liability. I've analyzed effects of product liability, including punitive damages, on corporate decisions and economic efficiency, focusing on pharmaceuticals, medical devices, and automobiles.(2) I've also deplored the threat of punitive damages for performing benefit-cost analyses.(3)

I agree with much of Viscusi's analysis.(4) I believe, however, that aspects of it can be strengthened and that his key policy recommendation lacks foundation. In the sections that follow, I discuss Viscusi's implicit assumption that promotion of economic efficiency is the only legitimate social goal of punitive damages, comment on the nature and strength of his historical evidence that punitive damages are often assessed because companies perform risk or benefit-cost analysis, sketch a theory of why the threat of such assessments is likely to deter socially worthwhile analysis in many cases, and comment on potential policy responses.

II. SHOULD ECONOMIC EFFICIENCY BE THE GOAL OF PRODUCT LIABILITY?

Professor Viscusi implicitly assumes that product liability policy should aim only to promote economic efficiency. He offers no hint that there can be other legitimate social goals. However, social goals are legitimate if they sensibly represent the preferences of enough members of society. In the context of product liability, some members of society may desire retribution(5) or value product safety more highly than is implied by their private risk-taking behavior.(6)

This economist is willing to respect the pursuit of policy goals other than economic efficiency if that's what enough members of society really want. There is ample reason to believe that much behavior within our product liability system undermines efficiency. But it is far from clear that this reflects widespread preferences for other objectives, because much of that behavior may, in fact, stem from mistaken beliefs about the actual effects of product liability. For example, who is actually punished when punitive damages are assessed on companies?(7) What does it cost society to pursue punishment or product safety beyond efficient levels? Are most individuals overly optimistic that firms rather than consumers bear such costs? Do most members of society really wish corporations to place a greater value on statistical lives than individuals implicitly place on their own lives through their private risk taking decisions? Have public policy deliberations about product liability and punitive damages generally been based on honest and intelligent consideration of economic effects?

At present, it is premature to conclude that economic efficiency is as unimportant to society as one might infer from observing product liability policy in its design and implementation. Unless it becomes clear that legal doctrine and the behavior of judges and jurors that undermine efficiency are based on accurate information and preferences for social goals besides efficiency, economists should--as Viscusi does--try to clarify economic effects of product liability, advocate pursuing efficiency through product liability policy, and propose policies aimed at efficiency. My comments are offered in that spirit.

III. PREVALENCE, INCIDENCE, AND SIGNIFICANCE OF PUNITIVE DAMAGES FOR ANALYSIS

Readers might wonder, despite Professor Viscusi's analysis, whether threats of punitive damages for risk and benefit-cost analysis actually deter such analyses and thereby undermine efficiency. They might wonder, for example, because his mock jury experiments involve automobile safety, and he points to instances of punitive damages for undertaking analysis only in the context of automotive product liability, but he does not discuss efficiency consequences for automotive manufacture, designs, or warnings.

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