Econ 522 Economics of LawLogisticsSlide 2ExperimentWhat were we trying to test?The resultsSlide 7Slide 8Slide 9Slide 10What does it mean?Slide 11Slide 12Inconsistency of damagesPunitive damagesSlide 16Example of punitive damages: Liebeck v McDonalds (1994) (“the coffee cup case”)Liebeck v McDonalds (1994)Slide 19What is the economic purpose of punitive damages?This suggests…Slide 21U.S. tort systemSlide 24Slide 25Slide 26VaccinesMass tortsCooter and Ulen’s overall assessment of U.S. tort systemTo wrap up tort law, a funny story from Friedman…Slide 30Over the last 2 ½ months, we have…Slide 33An example from Polinsky, “An Introduction to Law and Economics”Slide 35Slide 36Slide 37Slide 38Slide 39So what?Slide 40The goal of the legal processAdministrative costs and error costsSlide 44MidtermEcon 522Economics of LawDan QuintFall 2011Lecture 192MT2 graded, will be returned todayHW4 (last one) online – due Thurs Dec 8Longer than last coupleLogistics3Monday’sexperiment4You have been asked to serve on a jury on a lawsuit dealing with personal injury. In the case before you, a 50-year-old construction worker was injured on the job due to the negligence of his employer. As a result, this man had his right leg amputated at the knee. Due to this disability, he cannot return to the construction trade and has few other skills with which he could pursue alternative employment.The negligence of the employer has been firmly established, and health insurance covered all of the related medical expenses. Therefore, your job is to determine how to compensate this worker for the loss of his livelihood and the reduction in his quality of life.Experiment5What were we trying to test?(a) Should the plaintiff in this case be awarded more or less than $10,000?(b) How much should the plaintiff receive? (Please give a number.)(c) Are you male or female?The other half were asked…Half of you were asked…(a) Should the plaintiff in this case be awarded more or less than $10,000,000?(b) How much should the plaintiff receive? (Please give a number.)(c) Are you male or female?The question: how much did the “suggestion” affect answers to question (b)?6The results7The results8The results9The results1,000,000100,00025th Percentile80%36%% at least $1 MM22,500,00010,750,806Largest4.6 x5,000,0001,000,00075th Percentile1,600,000250,000Median140,00050,000Smallest5.5 x2,086,764382,653Geometric Mean3,892,0001,294,355AverageRatioAsked $10,000,000Asked$10,0003.0 x10The results11Nobody knows what a leg is worth“Reference point bias”“Framing effects”What does it mean?12Back to work…13Punitivedamages14Damage awards vary greatly across countries, even across individual casesWe saw last week:As long as damages are correct on average, random inconsistency doesn’t affect incentives (under either strict liability or negligence)But, if appropriate level of damages isn’t well-established, more incentive to spend more fightingInconsistency of damages15What we’ve discussed so far: compensatory damagesMeant to “make victim whole”/compensate for actual damage doneIn addition, courts sometimes award punitive damagesAdditional damages meant to punish injurerCreate stronger incentive to avoid initial harmPunitive damages generally not awarded for innocent mistakes, but may be used when injurer’s behavior was“malicious, oppressive, gross, willful and wanton, or fraudulent”Punitive damages16Calculation of punitive damages even less well-defined than compensatory damagesLevel of punitive damages supposed to bear “reasonable relationship” to level of compensatory damagesNot clear exactly what this meansU.S. Supreme Court: punitive damages more than ten times compensatory damages will attract “close scrutiny,” but not explicitly ruled outPunitive damages17Stella Liebeck was badly burned when she spilled a cup of McDonalds coffee in her lapAwarded $160,000 in compensatory damages, plus $2.9 million in punitive damagesCase became “poster child” for excessive damages, but…Example of punitive damages: Liebeck v McDonalds (1994) (“the coffee cup case”)18Stella Liebeck dumped coffee in her lap while adding cream/sugarThird degree burns, 8 days in hospital, skin grafts, 2 years treatmentInitially sued for $20,000, mostly for medical costsMcDonalds offered to settle for $800McDonalds serves coffee at 180-190 degreesAt 180 degrees, coffee can cause a third-degree burn requiring skin grafts in 12-15 secondsLower temperature would increase length of exposure necessaryMcDonalds had received 700 prior complaints of burns, and had settled with some of the victimsQuality control manager testified that 700 complaints, given how many cups of coffee McDonalds serves, was not sufficient for McDonalds to reexamine practicesLiebeck v McDonalds (1994)19Rule in place was comparative negligenceJury found both parties negligent, McDonalds 80% responsibleCalculated compensatory damages of $200,000times 80% gives $160,000Added $2.9 million in punitive damagesJudge reduced punitive damages to 3X compensatory, making total damages $640,000During appeal, parties settled out of court for some smaller amountJury seemed to be using punitive damages to punish McDonalds for being arrogant and uncaringLiebeck v McDonalds (1994)20We’ve said all along: with perfect compensation, incentives for injurer are set correctly. So why punitive damages?Example…Suppose manufacturer can eliminate 10 accidents a year, each causing $1,000 in damages, for $9,000Clearly efficientIf every accident victim would sue and win, company has incentive to take this precautionBut if some won’t, then not enough incentiveSuppose only half the victims will bring successful lawsuitsCompensatory damages would be $5,000; company is better off paying that then taking efficient precautionOne way to fix this: award higher damages in the cases that are broughtWhat is the economic purpose of punitive damages?21Punitive damages should be related to compensatory damages, but higher the more likely injurer is to “get away with it”If 50% of accidents will lead to successful lawsuits, total damages should be 2 X harmWhich requires punitive damages = compensatory damagesIf 10% of accidents lead to awards, damages should be 10 X harmSo punitive damages should be 9 X
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