Pricing v. Sanctions



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Pricing v. Sanctions

  • Pricing

    • Strict Liability

    • Smooth transition (risk of behavior is proportional to internalized cost)

      • Only meant to offset the harm cost/discourage inefficiency

      • Some productive level (think toxic chemicals or breaches)

    • Contracts (pay for breach, not judgement)

    • Sometimes instituting pricing sanctions may legitimize the behavior

      • Israeli daycare (people feel no moral shame)

    • Two types of lawyers: 1) the economist

    • Behavior is tolerable at appropriate level or with appropriate precaution (illegal parking)

  • Sanction

    • Negligence

    • Abrupt issuance of penalty (may have increased for intentional or repeated)

      • No concern for zero activity level

    • Moral element; remedy is a form of punishment

    • Two types of lawyer: 2) moral and intrinsic desire to comply with the law

    • None of the activity should exist (drunk driving)

Why Make Defendants pay? (Compensatory/corrective justice v. instrumentalism/deterrence

  • Compensatory/Corrective Justice (backwards looking)

    • Right the wrong and make amends (level the scale)

      • Can’t just be about returning the plaintiff to his position (must be defendant as well)

    • Compensatory ≠ Corrective justice

      • Compensatory

        • Restore P – Sometimes D is worse off (ie gain might not have been good)

        • Does it matter who pays? 9/11

      • Corrective Justice (Aristotelian)

        • Restore both D&P (Balance the scales)

        • Something pleasing about balancing scales

    • Relies on a legal trigger of requiring compensation (a wrong)

    • How do we determine baseline position?

      • Remember that some bad things snowball or may lead to good things

        • When can we stretch frame?

          • Court look at specific incident/transfer (immediate results of the breach or tort) (compare Cuban Revolutionary Court)

      • Act v. Omission (baseline is important)

        • What about all the harms that are put unto people, but not compensated

        • Think OWS...

      • Cuban Revolutionary Court

        • Peasant steals banana

        • Court hears evidence of oppression and determines shopkeeper is predatory and must expropriate wealth

        • US court’s see this as up to the legislature (political question)

      • What about if poor people pay less (ie what they can afford) and rich people pay more

        • Poor people will be under-deterred

    • Distributive Concerns: Is D ever justified? Are there exceptions?

      • Poorer people will be under-deterred  more accidents

      • Richer people will be over-deterred  reduced incentives to be rich & discouraging of potentially productive behavior

      • Without distributive justice (Cuban revolutionary court) only the distortion between the rich and the poor.

  • Economic or Instrumental Justice (deterrence) (forward looking)

    • Fixing the past wrong is besides the point (sunk cost)

Specific v. Substitutionary Remedies

  • Specific Remedy/performance – exact restoration

    • Ex. Hammurabi 235 (boat builder who must fix crummy boat)

  • Substitution – something else (damage/cash)

    • Court’s value is substituted, not value to the owner

Compensatory v. Super Compensatory

  • Compensatory

    • Standard measure in American system (aversion to windfalls)

    • Restore parties to pre-wrong position

    • Why 1 to 1 ratio

      • Instrumentally

        • Exact internalization of costs (optimal deterrence)

        • Perfect with SL or negligence

      • Morally

        • Plaintiff is paying for the harm caused

        • The system is not harming the defendant

  • Super Compensatory

    • Problems

      • Moral hazard problem: want someone to steal your sheep

    • Benefits

      • Instrumentality: don’t catch everyone

      • Moral principle of punishment

      • Want to discourage beyond just internalization (no efficient theft)

  • Why give to plaintiff?

    • Don’t want to discourage plaintiff from taking certain actions (loaning oxen in the Hammurabi example) for fear of not being compensated

    • Incentive to bring claims

      • But couldn’t government bring claims

    • However, plaintiff may take no precautions because of recovery

Public v. Private (Criminal Sanctions)

  • Why have public sanctions?

    • Vivid punishment

    • Goal of complete deterrence

    • Qualitatively different

    • Stigma

    • Deters people who may not be deterred by money

    • Allows for more preventative sanctions

    • Punishment for harms that may not discretely affect one individual (could be accomplished by private, but much more difficult given standing etc.)

Tort v. Regulation

  • Dyke penalty example (why penalize ex post and not inspect ex ante)

  • Why Regulation?

    • Defendant may be unable to compensate ex post

    • Small loses shared by lots of people

    • Agency can develop specific care standard (expertise)

    • Can take into account third party arms

  • Why tort?

    • Cost of inspection (have to check all dykes), and administrative costs

  • Why both?

    • Speeding tickets and crash liability

    • Capture some of both

Eye for an Eye – Sometimes a specific remedy can lead to an efficient result by allowing the parties to bargain for the appropriate compromise as opposed to having the court establish a baseline.
Penalty v. Reward

  • Depends on baseline situation (worse=penalty, better=reward)

  • Legal regimes tend to rely on penalties more than rewards

    • Why not?

      • Israeli daycare problem: implicitly approving bad activity if willing to pay

      • Loss aversion (people are more afraid of punishment), (thayler reading)

      • Conserve enforcement resource (more legal behvaiors)

        • Couldn’t you just up the reward and give it to less people

      • Secondary issues

        • Seat belt

          • Incentive to drive much more

          • This issue is context specific

      • Infringement on liberty (don’t want to be pulled over)

      • However, no problem of people paying



Amount of Compensatory Damages

  • Theoretically, the amount that would make the plaintiff indifferent to the loss

  • Market Value (default and effective in most cases)

    • What about subjective additional value? (only the marginal buyer is purely compensated)

      • Valuation tends to increase after purchase

        • Endowment effect (more value for something once it’s yours)

          • Why endowment effect?

            • Sour grapes (our shit’s the bomb)

            • Difference in value when we are selling and when we are not

            • Risk of trade falling through (1 in hand better than 2 in bush)

      • Prospect theory (value assessed as change not absolute)

        • Care much more about loses than gains (endowment, status quo bias)

      • Maybe subjective value isn’t important because the thing can be replaces however...

        • It could be a hassle (incidentals, attorney’s fees)

        • Some psychological value may be relevant

          • Sentimental value

        • What about Used goods (can’t replace my used car with as good of one for its value)

          • Over/ask differential

          • Lemon effect: Seller knows lots about the good, buyer has little and ast to make a judgement. Sellers with lemons will flood the market

        • Opportunity costs

    • Becomes problematic when there is no available replacement. (Trinity Church, natural resources)

      • Natural resources (potential ways to get market value)

        • Use value (commercial and recreational)

        • Existence value (value of having it there)

        • Cost of clean up

        • Contingent valuation

  • 50 Acres v. United States

    • U.S. takes crummy landfill. City replaces it with fancy one. Court holds that there is a market in landfills and that market value is appropriate.

    • Market value v. replacement cost

      • Replacement cost in case appears to be fancy landfill (couldn’t get another junk one)

      • City lost opportunity cost of waiting a decade for a new site

      • City would get huge windfall if compensated for fancy site

      • Risk added from buying the large landfill (what if city expands differently)

        • Functioning market would allow resale of used landfill (so could be irrelevant)

      • Substitute Facilities Doctrine

        • Have to replace it; only possible to spend more than paid; no actual benefit

      • Larry Silverstein (lesser of two rule) – Doesn’t work for substitute facilities doctrine

      • Alternative rule – replacement costs should be awarded for integral parts of a whole

      • Alternative hypo (ie when to award replacement) U.S. v. Ebinger

        • Building cooling tower is destroyed

        • Building is worthless without cooling tower (tower must be replaced)

        • Building’s old tower lifespan exceeded building lifespan (no windfall)

  • King Fisher Marine – Exception

    • Plaintiff buys a barge for $30,000 and gets sunk 3 days later

    • Plaintiff claims $200,000 dry dock (boats function)

    • Court awards $200,000 and guy did buy dry dock after

  • Texaco v. Pennzoil

    • Pennzoil claims that Texaco broke up $3 billion deal worth 10.9 billion

    • Sketchy that there was such a discrepancy, but seemed legit, judge holds for Pennzoil

  • Bottom line – Look at how much plaintiff needs to be paid to be brought up to baseline without windfall (doctrine is fine, evidence is important

  • Trinity Church v. Hancock

    • During construction of John Hancock building, damages is done to Trinity Church that will reduce the Church’s lifespan however the church is still functional (25% of lifespan lost)

    • Can church be awarded damages for a fraction of its lifespan?

    • Replacement costs – impossible given historic value (not a church in the suburbs)

    • Reconstruction Costs – How could you actually reconstruct it the same?

    • Market value is basically nil (what about subjective value)

      • Value doesn’t have to be objective, just has to be believable subjective (special use)

      • How can Trinity true subjective value show value?

        • Insurance

        • Coasian assessment

          • IE pick a middle figure and hope for the best (obvious error one way or the other, why not compromise)

          • Not a thing court’s like to do (blue bus problem)

    • Creative solution–Force Trinity to rebuild, have Hancock repay Trinity. This would encourage bargaining (neither party wants to rebuild)

    • Time value

      • When should the church receive damages?

      • Majority views harm as already having occurred (structural damage): broken now recover now

      • Dissent: harm is collapse (harm has not yet materialized)

    • Peavy House

      • Farmer leases farmland to mining company with covenant to restore land, cost of restoration is much greater than the difference in market value, company breaches, market value awarded. Why not issue specific performance and let them figure it out?

  • Property Tax Assessment – Looking for subjective value

    • Self assess system (Australia and Wisconsin)

      • Ask people to give subjective value, anyone can buy at that price

      • Compare to claiming races for horses ($20,000 means any horse can be bought for that)

      • Golf handicap

      • Admiralty–general average contribution (owners self assess value of cargo and compensate pro rata for any cargo that must be portaged)

  • Probabilistic Harms

    • Why only pay when harm is done, not every time you act negligent?

      • Compensation? (people who get hurt only get a small fraction) – insurance could handle

      • Huge administrative problem despite no good philosophical justification

    • Children dying on boats hypo (causation problem) (normally just a recurring miss)

      • Every year 10 children die from falling off of the ferry–life preservers, if added, would save 40% of the time.

      • Why not compensate each plaintiff 40%? Wouldn’t this avoid the compensation problem

        • Overcompensates the one’s who wouldn’t be saved, undercompensates the saved (maybe we don’t like being certain that we are wrong)

        • Litigation costs (10 trials instead of 3)

          • This wouldn’t be a problem if the boat got some danged life preservers

    • Lost-Chance Cases/recurring miss

      • Ex. medical malpractice decrease chance of death from 60%-75%

        • Court hold recovery for lost chance (40-25)

        • Must show >50% chance that D cause loss in chance

    • Market-Share Liability

      • Can show injury from drug, but cannot show which D made it

      • D should not escape liability merely because P cannot show which D injured which P

    • Alternative Liability (Summers v. Tice)

      • What if there were more hunters?

    • Should Tort world move to probabilistic remedies?

      • Perfect deterrence, matching is off (over/under compensated), administrative costs

    • Probabilistic Testimony

      • All testimony is probabilistic to some extent

      • Why not allow probabilistic evidence (I.e., 80% of buses are blue, you were hit by bus)

        • Incentive to get the best possible evidence

        • Juries won’t understand statistics

        • Allows us to pretend were 100% certain

      • Each element is a preponderance (can be less overall)

        • Congresse Juror Theorem (bays theorem)

          • If people are >50%, the group is very likely to be right as a whole (better than a single expert)

      • Conjunctive Fallacy

        • Linda (bank teller in feminist movement chosen over bank teller despite odds against this choice)

        • Base rate neglect (Mammogram example)


Boring Review

  • Contract

    • Measures of damages

      • Expectation–Position P would have been in if contract was performed

        • Very good at encouraging efficient breaches

        • Can encourage overreliance (overinvestment)

          • Better software v. worse software

          • Changes when the seller can efficiently breach

            • Option of investing additional 25 to increase total value from 200 to 230 (from buyers perspective, make the deal)

            • When the seller breaches this investment is lost

            • Always efficient for the buyer, but not for the system as a whole

            • (1/3*-25 + 2/3*5)

        • Overall, does not create perfect incentives, but better than reliance and restitution b/c it creates incentives for efficient breach and is no worse at efficient reliance

      • Reliance–Position P would have occupied if the contract had never been made

        • Will encourage inefficient breaches and overreliance

        • Could be equal to expectation if opportunity costs are included

      • Restitution–Unjust enrichment (disgorgement of profits)

        • Defendant to his rightful position does not include gains from breach

        • Deters overreliance

        • Encourages inefficient breachs

    • Why no negligence in Contract?

      • No moral culpability

      • Contractors don’t want it

      • More expensive to enforce breached contracts

      • However, Levinson is not convinced that the reason is obvious

    • Liquidated Damages–Courts don’t like these

      • Will enforce only when damages are meant to be an approximation of expected compensator damages and actual compensatory damages are tough to measure

      • Why would parties want supercompensatory? (who knows)

        • Parties could just gamble

        • May have idiosyncratically high value on performance (tour bus to NYU reunion)

          • However, you are allowed to add bonuses

    • Lost volume sales (Neri marine – when sale is repeatable award difference and profit)

    • Mitigation

      • Groves v, Warner

        • Contractor sued concrete supplier, claimed that contractor could have mitigated by hiring a new supplier

        • Rule: Must take reasonable steps to mitigate (Applies to Tort and Contract)

          • Analogous to negligence or cost/benefit

          • Eliminates overreliance problems from boring review

          • Foreseeability can counter – warn etc.

        • Equal Opportunity Rule: Same mitigation steps were available to both parties

          • Rule can’t be right?

            • What about employment (equal mitigation of hiring the employee back, however mitigation is required for plaintiff)

      • Evra v. Swiss Bank

        • Evra pays for wire transfer, loses big deal when transfer is botched

        • Hadley v. Baxendale is applied (pre-breach behavior, not post breach of avoidable consequences)

          • But this isn’t a contract case (the bank hired the swiss), it’s torts

        • Does it make sense to apply Hadley?

          • Negligence in tort suggest the rule is unnecessary in Tort

          • What about avoidable consequences? (want the plaintiff to act reasonable even if they know that the defendant is negligent)

        • Is posner wrong?

          • Compare Groves idea of cheapest cost avoider (mitigator)

            • Cheaper for Evra to send the money earlier

          • Could have used Tort law supplements (contributory negligence, foreseeability and proximae causation, assumption of risk, seatbelt rule but cf. eggshell skull)

        • Evra may make sense because incentives are closer to strict liability in most negligence cases (ie who assumes the other person is non-negligent) therefore plaintiffs should take optimal precautions

  • Tort

    • Unilateral Tort (only tortfeasor’s behavior matters)

      • SL – Leads to efficient behavior if damages are right (depends of level of compensatory)

        • Tortfeasor will internalize both benefits and costs

      • Negligence – Efficient as long as standard of care is right

    • Bilateral Tort (tortfeasors and victims behavior affects the risks and the severity of accident)

      • SL – Will not lead to efficient victim behavior, remedy = contributory negligence

        • Activity level–efficient for tortfeasors, no incentive for victim even under CN

      • Negligence–victim will be incentivized assuming tortfeasors is efficient

        • No efficient activity level

    • Special Rules

      • Eggshell-skull – Take the Plaintiff as they are.

        • Tends to depend on court’s intuition with regards to D’s liability (compare if Putney was playing kickball)

      • Seatbelt rule – reduce the amount of damages plaintiffs can recover for failing to wear their seat belts in car accidents. (Pre-tort*amount of damage)

      • Contributory negligence – negligence of plaintiff counters negligence of defendant

      • Avoidable Consequence–P has a duty to mitigate (cf. equal opportunity)

      • Forseeability/Proximate Causation– Compare Hadley, can rule as matter of law, (some harm may be and some may not (unfair to have d pay all)).

      • Assumption of the risk–P cannot recover for conscious taking of unreasonable risk

      • Economic Loss Rule– no recovery for purely economic harms

  • Dilemma of Compensation – Easy to get perfect incentives for one side, difficult for both (see issues with activity level in negligence)

    • Possible solutions: public law (workers comp); decoupling (amount paid by P is not amount D receives); allow leeway for liquidated damages.


Economic Loss Rule (Pure Pecuniary Loss)

  • General Rule – You can always recover for injury to person or property, but not pure pecuniary

    • Ex. You hit Arod, he can recover medical and lost wages, but Yankees can’t recover ticket sales

    • Used selectively

    • Concern for insolvency – may be impossible to compensate all of those

    • Eliminates potential to falsify info/effect

    • Fear of unlimited liability

      • Must draw arbitrary circle (Compare Pruitt w/ palsgraf)

  • Pruitt v. Allied Chemicals – Water is polluted and fish are screwed up

    • Three plaintiffs – Commercial fisherman; distributors, retailers, restaurants; Surrogates (bait shops, boat owners)(surrogates are allowed as stand-ins for sports and rec fisherman)

    • Full application of PPL would mean no recovery for anyone (no one owns the fish)

      • Why?

        • Trade off between under-compensation and under-deterrence, and defendant side corrective justice

        • What about offsetting economic benefits

          • Rickers v. Sun Oil – oil taker destroys bridge to island

            • Mainland businesses profit more as island business lose

              • However people chose island, so loss of surplus

          • Securities fraud – some lose, some gain

    • Third parties could contract with those who are directly harmed, this would create a relationship

    • Regulation might be better in cases like this

      • No need for false substitutes/stand-ins

      • Single plaintiff (government)

      • Funds can be used for compensation and clean up, etc (a large range of things)

      • Government may be in a better position to figure out who has been harmed than courts

  • Feinburg’s approach to economic lass in BP

    • Geographic limitation initially (water’s edge), but expanded to more nebulous proximate cause


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