Products Liability and Economic Activity: An Empirical Analysis of Tort Reform's Impact on Businesses, Employment, and Production

By Shepherd, Joanna M. | Vanderbilt Law Review, January 2013 | Go to article overview

Products Liability and Economic Activity: An Empirical Analysis of Tort Reform's Impact on Businesses, Employment, and Production


Shepherd, Joanna M., Vanderbilt Law Review


For decades, advocates of tort reform have argued that expansive products liability stifles economic activity by imposing excessive and unpredictable liability costs on businesses. Although politicians aspiring to create jobs, attract businesses, and improve the economy have relied on this argument to enact hundreds of reforms, it has largely gone empirically untested. No longer. Using the most comprehensive dataset to date on products liability reforms and economic activity, I find that many reforms that restrict the scope of products liability improve economic conditions. Specifically, these reforms increase the number of businesses, employment, and production in the industries that face most of the products liability claims: the manufacturing, retail, distribution, wholesale, and insurance industries. However, several other popular reforms have either a weak effect or no effect on economic activity. My results have important implications for recently enacted reforms and proposed legislation: while many of these reforms will improve economic conditions as lawmakers hope, others will have no effect. In the current economy, as business groups intensify their demands for tort reform, my findings provide critical evidence for courts and legislatures that are reassessing the appropriate scope of products liability.

INTRODUCTION ...............................258

I. THE EVOLUTION OF PRODUCTS. LIABILITY LAW ..............................262

A. Early American Law ..............................263

B. Modern American Law ..............................265

C. The Liability "Crisis" ..............................266

D. A Period of Reform ..............................267

1. Statutes of Repose ..............................269

2. Reforms to Product- Seller Liability ..............................270

3. Reforms to Joint and Several Liability ..............................271

4. Reforms to the Collateral Source Rule ..............................272

5. Nonecono mie Damage Caps ..............................272

6. Punitive Damage Caps ..............................274

7. Comparative Negligence ..............................275

8. Other State-Level Reforms ..............................276

9. Federal Reforms ..............................276

II. BENEFITS AND COSTS OF PRODUCTS LIABILITY LAW ..........278

A. Benefits of Products Liability Law ............279

1. Compensation of Victims ..............................279

2. Improvements in Product Safety ...........281

3. Reduction in Purchases of Risky Products ....285

B. Costs of Products Liability Law ..............................285

1. Excessive Transaction Costs ..............................286

2. Deterrence of Socially Beneficial Purchases.......................................................................287

3. Reduction in Economic Activity...................................287

III. Empirical Analysis of the Relationship between Products Liability and Economic Activity...........................290

A. Measures of Products Liability......................................291

B. Measures of Economic Activity.....................................293

1. Number of Small Business Establishments..................................................................294

a. Small Businesses...........................................................294

b. High-Risk Industries......................................................296

2. Employment..................................................................297

3. Gross State Product.......................................................298

C. Econometric Methodology..............................................298

D. Empirical Results...........................................................301

1. Business Establishments..................... …

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