Document Type

Article

Publication Date

2008

Keywords

negligence, hand formula, legal bargaining, valuation, tort theory, negligence theory, strict liability, settlement

Abstract

The economic models of bargaining and tort law have not been integrated into a coherent theory that reflects the operational realities of the dispute resolution process and the negligence standard. Applying a theory of bargaining based on asset pricing principles of financial economics, this Article argues that there is systematic devaluation of tort claims in the civil litigation system. This results because in essence the parties value different tort transactions, even when they are tied together in a common dispute and view the facts and laws similarly. For the party that can mitigate the risk exposure, the discount to value presents an arbitrage opportunity in which the bargaining process represents a superior pricing in the private market than the public judicial forum, which presumably applies the Hand Formula. Under this analysis, the fault standard is both an instrument of valuation and a cost-shifting mechanism. The conventional view of cost allocation is misleading. When we properly account for the cost of the risk-adjusted discount, we see that the plaintiff bears the substantial portion of the cost of resolution. Negligence creates the greatest litigation risk, and the resulting devaluation of the asset incentivizes defendants to settle at rates lower than the public price. These functionalities connect the historical origins of negligence to its "unexpected persistence" today. As long as bargaining is the primary method of dispute resolution, tort law is structurally incapable of maintaining the judicial standard of care.

Disciplines

Insurance Law

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