Law and Economics-Charles W. Upton Is Tort Law about Money

Is Tort Law about Money? Standard TV commercials proclaim “if a doctor or driver or… injured you, they must pay”. We don’t worry about money.

Is Tort Law about Money Mrs. Jones’ Operation Ms. Jones about to have an operation.

Is Tort Law about Money Mrs. Jones’ Operation Ms. Jones about to have an operation. There is a probability p that she will suffer damages D. Both p and D are well known

Is Tort Law about Money Mrs. Jones’ Operation Ms. Jones about to have an operation. There is a probability p that she will suffer damages D. Both p and D are well known Both are beyond the control of either the surgeon or Ms. Jones.

Is Tort Law about Money Mrs. Jones’ Operation Ms. Jones about to have an operation. There is a probability p that she will suffer damages D. Both p and D are well known Both are beyond the control of either the surgeon or Ms. Jones. Whom do we make liable?

Is Tort Law about Money First Liability Rule The surgeon is not liable –Damages are borne by the patient, either directly or via an insurance policy. –The cost of the policy will be pD

Is Tort Law about Money Second Liability Rule The surgeon is liable –He purchases an insurance policy and passes its cost along to the patient. –The patient will then pay an additional pD for the operation.

Is Tort Law about Money Second Liability Rule The surgeon is liable –He purchases an insurance policy and passes its cost along to the patient. –The patient will then pay an additional pD for the operation. In either case, the patient pays.

Is Tort Law about Money Other Factors The probability of the surgery going wrong depends on the surgeon. There are three choices –Dr. Excellent –Dr. Careless –Dr. Poorly Trained

Is Tort Law about Money Chances of Success

Is Tort Law about Money Chances of Success Damages from a Bad Accident are $1,000,000

Is Tort Law about Money Chances of Success Damages from a Bad Accident are $1,000,000 Neither Doctor or Patient can affect outcome

Is Tort Law about Money Chances of Success Damages from a Bad Accident are $1,000,000 Neither Doctor or Patient can affect outcome Dr Excellent gets $25,000

Is Tort Law about Money Operation Fees The doctor is responsible for any injuries and Insurance Companies or Patients can tell who is good and bad.

Is Tort Law about Money Operation Fees The doctor is responsible for any injuries and Insurance Companies or Patients can tell who is good and bad. Ms. Jones would be indifferent between using any one of the doctors, but Careless and Poorly Trained would have incentives either to get out of the business, or be more careful, or get better training.

Is Tort Law about Money Operation Fees The patient is responsible for the injury and can tell what the skills of the doctor are.

Is Tort Law about Money Operation Fees The patient is responsible for the injury and can tell what the skills of the doctor are. Again, Careless and Poorly Trained earn less because of their inferior skills, whether due to training or to attitude.

Is Tort Law about Money Operation Fees The patient is responsible but cannot tell the difference between doctors.

Is Tort Law about Money Operation Fees The patient is responsible but cannot tell the difference between doctors. That is, the patient is 2/3 likely to pick a bad doctor. Thus, even if we assume the Doctors cannot affect the outcome, we want them to be liable to send a signal to the patient.

Is Tort Law about Money Operation Fees The patient is responsible but cannot tell the difference between doctors. That is, the patient is 2/3 likely to pick a bad doctor. Thus, even if we assume the Doctors cannot affect the outcome, we want them to be liable to send a signal to the patient. The Doctor becomes an efficient risk bearer.

Is Tort Law about Money The Patient Determines the Outcome of the Operation

Is Tort Law about Money The Patient Determines the Outcome of the Operation If the patient is prudent, a 2% chance of failure; if the patient is careless, a 3% chance of failure

Is Tort Law about Money Patient Behavior Matters

Is Tort Law about Money Patient Behavior Matters If the Doctor is Liable, he will buy insurance based on the expected $30,000 damages from the careless patient.

Is Tort Law about Money Patient Behavior Matters If the Doctor is Liable, he will buy insurance based on the expected $30,000 damages from the careless patient. Why the careless patient? Moral Hazard

Is Tort Law about Money Patient Behavior Matters If the Doctor is Liable, he will buy insurance based on the expected $30,000 damages from the careless patient. Why the careless patient? Moral Hazard Cost to patient = $25,000 operation fee plus $30,000 for insurance

Is Tort Law about Money Patient Behavior Matters Cost to patient = $25,000 operation fee plus expected risk of damages.

Is Tort Law about Money Patient Behavior Matters The Patient has an incentive to be prudent

Is Tort Law about Money Patient Behavior Matters The Patient has an incentive to be prudent Remember the patient is now the efficient risk bearer.

Is Tort Law about Money The General Proposition If behavior is unaffected, assignment of liability has no economic consequences. When behavior matters, assignment of liability can affect social cost.

Is Tort Law about Money The Proposition Modified If behavior is unaffected, assignment of liability has no economic consequences. When behavior matters, assignment of liability can affect social cost. While our examples have either the doctor alone or the patient alone the efficient risk bearer, in real life both play a role.

Is Tort Law about Money End ©2004 Charles W. Upton