Post by Keith Hylton
Tony Sebok’s post on tort damages and discrimination presents a fascinating problem that I’ve often used as a basis for discussion in my torts classes. If race (or some other feature likely to be discriminated against) is taken into account in an attempt to predict the future earnings of a tort victim, then damages awards will reflect the wider discrimination in society, in a sense making the tort plaintiff who falls into a discriminated-against category a victim twice, once at the moment of injury and again at the moment of compensation.
Sebok, citing a new paper by Ronen Avraham, suggests that this is a shortcoming for the Hand Formula and for law and economics generally. I am not sure this conclusion is warranted. When I have talked to students about this issue, I have often treated it as a problem associated with the Hand Formula, but only to prompt discussion. In truth, it is a problem that has nothing to do with the Hand Formula, or with law and economics.
The core of the problem is found in the calculation of compensatory damages, not in the Hand Formula. To see this, imagine a system of strict liability, based on something like Richard Epstein’s 1973 suggestion of causation-based liability (Richard A. Epstein, A Theory of Strict Liability, 2 Journal of Legal Studies 151 (1973)). In the version of corrective justice that Epstein then espoused, causation is a sufficient basis for liability, and liability should be strict. How would a rational actor behave under such a test? He would consider the burden of precaution and compare it to the likely liability judgment he would face. The result is that if he perceived that damages would be lower if the victim is black than if the victim were white, he would have a lesser incentive to take care in the presence of blacks. In other words, he would drive with less care through black neighborhoods. Troubling, yes, but even in a world in which the tort system is modeled according to Kantian ethics, the same incentive structure would exist as long as damages are correlated with race in the usual way.
Is there a solution to this problem? I’m not sure there is a simple solution. One is to prevent courts from taking such factors as the victim’s race into account in estimating lost future earnings. But socio-economic status is much more difficult to exclude, and could be a route through which societal discrimination infects damages estimates. Another potential technical solution is to use options theory to determine damages, recognizing that the value of a life, especially that of a child, is comparable to that of an asset with an infinitely variable value. I suggested this solution to Ronen in a conversation we had at the American Law and Economics Association Meeting in May, but we both noted that there are questions raised by it. Still, the options pricing approach offers a technical solution to the problem of discriminatory damages, drawing directly from the economics literature and therefore hopefully suggesting that economics is not merely a source of troubles for tort law.
I discuss this and many other problems in the tort damages system in the last chapter of a forthcoming book on tort law (Tort Law: A Modern Perspective, Cambridge University Press, 2016). Here’s another problem: a tortfeasor who injures a victim in a manner that leaves the victim cognitively unable to perceive his lost opportunities can argue, entirely consistent with the law, that compensatory damages for pain and suffering should not reflect the emotional loss of the life-opportunity taken away. This provides tortfeasors an incentive to inflict the most harmful injuries on their victims. The law of damages is worryingly shortsighted in some important respects, but this is a discussion I will save for a later post.
I agree with Keith that the adverse incentives created can happen in various legal regimes.
I am curious to see how far option theory can get us in aligning economic analysis of law with our intuition and with fairness.
I am obviously was not the first one to observe this problem. I am standing on the shoulders of others, primarily Martha Chamallas and Jennifer Wriggins, who have written over the years on the problem of race and gender based damages, although not so much from the perspective of economic analysis of law.
It is interesting to observe that sometimes the discriminatory effect might be socially desirable. Professor Avraham Tabach (Tel Aviv Faculty of Law) and I recently observed that sometimes “targeting” the disadvantaged is both efficient and beneficial for them. For example consider the case when drivers (attracted to minority neighborhoods due to the lax liability regime applied there) confer a large enough benefit on the residents, such as when they stop to purchase in the neighborhoods’ stores.
Perhaps a more realistic example can be found not with drivers and residents but with doctors and patients. Suppose minority neighborhoods cannot attract doctors to their neighborhoods because they cannot compensate them enough for the provision of the doctors’ high value medical services. Since doctors confer benefits on their patients, which on average at least in some areas of medicine, is larger than the harm they might inflict on them, minority neighborhoods might be “happy” to be “targeted.” That is, they might attempt to attract doctors not by offering them high salaries (because they can’t), but by offering them essentially a lower standard of care. An OBGYN who makes $300,000 a year but has to pay $150,000 liability insurance might feel incentivized to work in a minority neighborhood where he makes only $200,000 but his insurance premium is just $20,000 due to a lower standard of care. Moreover, the people themselves might be better off– without a reduction in the standard of care they will get no OBGYN at all.
We basically identify an activity-level benefit that the injurer confers on his victims and suggest offsetting the liability for the harm he inflicts with the benefit he bestows. This is in the spirit of the work done by Cooter and Porat.