The New Palgrave Dictionary of Economics and the Law Punitive Damages

Abstract: This entry concerns punitive damages. In considering the rationale for the award of punitive damages, we refer to two broad social goals: deterrence and punishment. In section 2 of the entry, we review the basic theory of deterrence, and in sections 3 through 6, we discuss the main deterrence-related justifications for punitive damages: the possibility of escaping sanctions; underestimation of harm; socially illicit gains; and inducing parties to bargain rather than acting unilaterally to cause harm. Then in section 7 we examine the punishment goal and how it is served by punitive damages, and in section 8 we consider how the punishment and deterrence goals should jointly determine damages. Finally, in section 9 we address a variety of extensions to the analysis and certain legal doctrines that bear on the award of punitive damages