Paul Rubin and Joanna Shepherd of Emory Law School have an interesting paper on SSRN which looks at the effect of tort reform on accidental deaths. One of the goals of tort law is deterrence. Thus, we normally think that if one has a higher penalty function, then the penalty will deter more “bad” actions and will increase safety. This is because actors will internalize the costs of their potential harm and increase their level of care.
However, what if the assumptions underlying this model are violated? For example, normally we assume that damages are pecuniary, injurers and victims are strangers, there are zero transactions and litigation costs, and the actions of potential tortfeasors are harmful —not protective. If we think about med mal we have large amounts of non-pecuniary damages, a contractual relationship between the doctor and patient, significant costs of operating the liability system, and many defendants in liability lawsuits are actual trying to help the victim.
Here’s Rubin & Shepherd’s punch line…
Because injurers and victims are in a contractual relationship, victims will pay for potential damage payments ex ante in the form of higher prices. The ex antepayments must cover not only pecuniary damages, but also non-pecuniary damages (which are damages for events that do not raise the marginal utility of wealth and which do not create a demand for insurance) and administrative costs. As prices increase, consumers become less willing to pay for the goods and services covered by tort law. Suppliers may decide to stop supplying the goods and services altogether. And because many of these goods and services would reduce accident risk, increasing tort liability may actually lead to increased, not reduced, accident risk. Similarly, tort reforms that decrease tort liability and make risk-reducing products more available and affordable may reduce accident risk.
They find that caps on punitive and non-economic damages, a higher evidence standard for punitive damages, and pre-judgment interest reform are associated with a decrease in accidental death rates. In contrast, reform of the collateral source rule generates increases in accidental death rates. In sum, state tort reforms have saved a net of 14,222 lives.
This is an important paper in the sense that it goes to the heart of the trial bar's argument that we are worse off after tort reform as we have lost “our right to be compensated.” In fact, using Rubin and Shepherd's conclusions we have traded some reduction in compensation for some 14 thousand lives.