Student Blogger - Law and Economics Workshop: Product Liability... Dispelling the Hype
Last week, Professor Mitchell Polinsky presented his paper, The Uneasy Case for Product Liability (co-written with Professor Steven Shavell), available at http://www.law.uchicago.edu/files/files/Polinsky.pdf, to question whether the benefits of product liability outweigh its costs.
What It’s About
The general consensus out there is that product liability is a good thing. Punishing “bad” firms may incentivize these least cost avoiders to invest more in product safety. Firms pay for lawsuits by raising prices, so that the price accurately reflects the risks that customers were underestimating. Victims get money.
But not so fast. What if the consumer market and regulators already provide those same benefits, so that product liability is largely duplicative? Professor Polinsky points to several empirical studies to show that the rise of product liability torts has had no noticeable effect on accident rates. He notes that, for widely sold products or for markets where the consumers are especially knowledgeable, firms and regulators already have an incentive to improve product safety. Product liability may play a non-redundant role in helping publicize risks or internalizing costs where consumers are underestimating product riskiness or the cost of third-party injuries... but these incremental gains may be outweighed by the cost of maintaining the product liability system:
When companies raise prices on consumers to pay for their tort liabilities, they aren’t just internalizing the cost of the injury risk (something that consumers would care about); they’re also passing on the cost of litigation (which consumers don’t care about) and the cost of pain and suffering damages (while consumers care about compensation for pain and suffering damages, the price rise more than offsets this benefit). Most consumers, if given the choice, wouldn’t buy insurance for pain and suffering, and yet the product liability tort, by awarding damages for these intangibles, basically forces all consumers of the product to chip into a court-run insurance scheme in the form of product liability. Raising the cost of the product to pay for “benefits” that consumers don’t really care about may take desirable products out of the market.
What Was Discussed
The first exchange of comments focused on why the market alone might not accurately price for risk. Consumers might have disproportionately adverse reactions to dramatic news stories, even if the actual risk of failure is small. Companies may seek to remedy a product defect with better advertising, rather than better safety features.
Other participants noted the difficulty of tracing the effect of product liability, since contemporaneous changes could affect the data. Perhaps the development of superhighways and new technology had more to do with changes in safety than product liability. Perhaps the damages rate didn’t go down because more defects were being discovered and counterbalancing the positive effect of product liability suits. Perhaps the increase in lawsuits reflects the increased ease with which plaintiffs could raise product liability claims during the 70s. To these, Professor Polinsky responded that the most reliable way to measure whether product liability actually had an effect would be to measure the underlying accident rates—and those stayed the same. Perhaps, as one participant suggested, there could be a geographic comparison across jurisdictions. (That, too, might have problems, since a national or international firm, facing a higher level of liability in, say, 48 out of the 50 states, might find it cost-effective to cater the product to the 48 states and let the two outlier states free-ride on the benefits.)
At this point, the conversation shifted to a discussion on the correct response. If product liability is ineffective because courts are “dumb,” why not educate courts instead of getting rid of product liability altogether? Why is ex ante regulation better than ex post litigation? Professor Polinsky clarified that his paper doesn’t aim to show that regulation or some other mechanism of increasing safety is superior to product liability; rather, his aim is to suggest that, assuming all other mechanisms are in place, product liability’s benefits isn’t worth its own maintenance costs.
Toward the end of the discussion, Professor Polinsky returned to the question of why he chose to focus his critique on product liability. He noted that product liability is different from many other torts because the market is more of a corrective force here than in other torts. Product liability torts look a lot like regulation, except that product liability imposes a cost without controlling how the company should respond. The existence of these other effective mechanisms may make the usefulness of product liability torts more questionable.
If product liability’s costs outweigh its benefits, why not just make it less costly rather than eliminating it? Professor Polinsky’s paper already identifies the areas where costs are greatest: litigation costs and pain and suffering costs. One participant already suggested one way to reduce litigation costs: force companies to automatically pay upon a showing of injury. Other participants seemed very resistant to the idea, since even in a strict liability regime, there needs to be some showing of causation (e.g., if a “victim” sues a drug company for an unsafe drug, he must at least prove that he took the drug) for the tort to have the correct deterrence and pricing effects. However, the underlying point—that we can do something to reduce costs rather than scuttle the whole system—seems like a good suggestion.
For example, Professor Polinsky mentioned the possibility of switching to the English rule in product liability. Another way to reduce litigation costs would be to have a truncated adjudication for certain product liability mass torts. For example, in settling asbestos class action suits, courts have bound future claimants to adhere to an expedited, largely administrative process. Similarly, worker’s compensation programs preclude employees from litigating their injuries in tort, binding them to a predetermined schedule of damages.
Also, courts could refuse to award pain and suffering damages. Even if there is no such thing as pain-and-suffering insurance plans, those who have idiosyncratic enough risk preferences to want such insurance could buy extra protection for those misfortunes that they suspect will lead to pain and suffering, via health or life insurance. And to the extent that society has a visceral or moral desire to vindicate pain-and-suffering victims, perhaps the emotional distress torts or criminal penalties are a better avenue for such feelings than product liability.
All this is simply to suggest that, even supposing that Professor Polinsky’s point is correct—that product liability is too costly—it’s still an open question what courts should do with this new insight, maybe a question for papers to come.