"Second Best Damage Action Deterrence," DePaul Law Review (forthcoming 2005)By Margo SchlangerAbstract: Potential defendants faced with the prospect of tort or tort-like damage actions can reduce their liability exposure in a number of ways. Prior scholarship has focused primarily on the possibility that they may respond to the threat of liability by augmenting the amount of care they take. Defendants (I limit myself to defendants for simplicity) will increase their expenditures on care, so the theory goes, when those expenditures yield sufficient liability-reducing dividends; more care decreases liability exposure by, simultaneously, making it less likely that the actors will be found to have behaved tortiously in the event of an accident and subsequent lawsuit and shrinking the probability and perhaps the severity of accidents. What prior scholarship has not focused on is that even contemplated behavioral changes - in the type rather than amount of care defendants take or the type rather than amount of harm they inflict - that do nothing to shift the probability or severity of accidents may in many circumstances limit expected liability by lowering the probability of claims or losses, or the expected amount of damages. In particular, potential litigation can induce potential defendants to favor more cognizable and demonstrable care, and less cognizable or demonstrable harm. Potential defendants should be expected to take advantage of myriad liability-minimizing substitution opportunities. This paper, to appear in the DePaul Law School's Clifford Symposium, explores these opportunities. The points it makes fit in the general category of applications of the theory of the second best. That theory, foundational to modern welfare economics, if a bit under appreciated within law-and-economics, suggests that in economic systems that suffer from inconsistent or otherwise non-optimal features, correction of some subset of such features may well backfire. Similarly, I am suggesting that interventions in torts that fail to take account of the substitution opportunities I describe may have problematic consequences. But where many applications of the theory of the second best look extremely broadly at multiple markets and market participants, as well as the relevant legal frameworks, mine remains more manageably situated within torts as inflected by litigation processes.
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