Academic journal article Journal of Forensic Economics

Hedonic Damages as Deterrent: A Reply to Viscusi

Academic journal article Journal of Forensic Economics

Hedonic Damages as Deterrent: A Reply to Viscusi

Article excerpt

I. Introduction

In a recent article in this Journal, Kip Viscusi (2000) put forward three propositions concerning the use of the hedonic value of life in personal injury actions:

* Hedonic value of life should be used to determine liability.

* Hedonic value of life should not be used to measure damages in fatal accident litigation.

* When the hedonic value of life is used to measure damages, manufacturers are led to make "excessive" investments in life insurance.

The purpose of this Comment is to respond to Viscusi's propositions. In Sections II-IV, it is argued that Viscusi's first two propositions are inconsistent with one another. Whereas his first proposition is based on the view that damages are designed to deter negligent behavior, implementation of his second proposition would remove the primary tool that the courts have to induce firms to behave non-negligently.

Viscusi's third proposition is based on the argument that expenditures made by manufacturers in response to threats of tort liability are analogous to purchases of life insurance. If a value-of-life measure of damages is used, manufacturers purchase more insurance than their customers would have chosen for themselves. In Section V it is argued that manufacturers' expenditures are more usefully seen as being purchases of safety precautions. In this light, it is seen that they purchase the amount of safety that their customers consider to be optimal.

II. The Deterrence Goal

Viscusi's first proposition, that the value-of-life approach should be used to determine liability, is based on the view that one of the functions of tort law is to encourage manufacturers to undertake efficient precautions. This view derives directly from the classic statement of the external cost problem.

Assume that the expected private cost to individual A of increasing his current level of activity is $80 and that the expected private benefit is $100. Assume also that there is a one in 100,000 chance that this increase will impose a $3,000,000 cost on individual B; that is, that the expected external cost of A's action is $30. In this circumstance, the expected social benefit of A's action is $100 and the expected social cost is $110 (= $80 + $30). Net social costs are $10, making the action inefficient. If A is able to ignore the effect that his action is expected to have on B, however, economic theory predicts that he will take that action (because private net benefits are positive). One method that has been proposed for avoiding this inefficiency is to "internalize" the external costs of A's actions by requiring that A compensate B for any harm that is imposed. With this internalization, A's private cost will equal the social cost, of $110. As this cost exceeds his private benefit of $100 he will no longer take the action--which is the socially preferred outcome.

Similarly, assume that, at A's current level of activity, there is some expenditure that A could take that would reduce B's expected costs by more than the cost of the expenditure. That expenditure would be socially efficient. For example, assume that by spending $1,000, A could reduce the probability that his activities would harm B from 110 in 100,000 to 70 in 100,000. If it is again assumed that the harm to B would be $3,000,000, the expected benefit of A's expenditure would be $1,200. Although such expenditure would be efficient--the net social benefit would be positive--A would not be expected to take it if the harm to B was "external" to him. Again, one method of encouraging A to invest in precautions that benefited B would be to internalize these external costs, by requiring A to pay for all harms that his actions imposed on B.

Many economists who have modeled the development of the common law have suggested that tort law has evolved to perform this internalization function. (1) Tort rules act as a warning to economic agents that they will be held accountable for the full social costs of their actions--including the external costs that those actions impose on third parties. …

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