The first class of problems stems from the judgment biases
of jurors. Because of loss aversion biases, jurors will impose
excessive penalties on novel risks. Because of hindsight biases,
jurors will believe incorrectly that the risk could have been
The second class of problems arises from excessive levels of
damages. Although jurors tend to agree about what behavior
is blameworthy, they are all over the map in assessing damages.
Compensatory damages for economic loss are reasonably well
defined. However, assessments of pain and suffering awards
and punitive damages awards are fraught with error, no doubt
in part because jurors are not given firm guidance with respect
to how they should go about setting the level of these damages.
The result is that there may be multi-billion-dollar blockbuster
punitive damages awards, but these awards do not enhance
safety because they are random, rare events. More generally, for
large levels of punitive damages costs, there is in fact a counterproductive
effect of punitive damages that discourages product
improvements and new product introductions. Exiting the market
altogether is often the desired course.
Third, firms are hampered in their efforts to reduce risks
in an efficient manner by juror aversion to the measurement
of risk. Companies that conduct risk analyses are vilified for
intentionally endangering the public. When confronted with
particular injury cases, the jury's balancing abstracts from the ex
ante expectations that necessarily guide corporate decisions and
instead compare the identifiable victim with the product-specific
cost of greater safety.
And don't miss the reading list at the end. The Regulation essay is a shorter version of one that will be in a collection called The American Illness, which looks to be a must-read. I discussed many of the same problems in my 2007 essay, "Rollover Economics."