Three Essays on the Economics of Tort Law

In recent years, the economic analysis of tort law has gained considerable attention. In this dissertation, three areas relating to tort law are examined: the enactment of caps on punitive damages, the impact of taxable costs statutes on settlement rates, and the optimal level of attorney advertising. ^ In the first essay, an economic theory justifying caps on punitive damages is tested via hazard analysis. Under the traditional theoretical model, punitive damages are imposed as a solution to the problem of imperfect detection. When litigation costs are incorporated into this model, caps on punitive damages induce underdeterrence, but also reduce litigation costs. At the optimum, caps on punitive damages are justified when the marginal benefit of deterrence equals the marginal litigation cost. Separate hazard analyses uncover an inverse relationship between construction-and-manufacturing activities and cap enactment. There is also evidence that political pressure by the legal services and insurance industries has an impact on cap enactment. ^ The second essay focuses on the impact of taxable costs statutes on settlement rates. Taxable costs statutes impose liability on the losing party at trial for statutorily-authorized litigation costs. In this paper, Bebchuk\u27s (1984) asymmetric information model of litigation is extended to incorporate taxable costs. The theory predicts that increasing the number of taxable costs decreases the settlement rate. Empirical testing is performed via an ordinary least squares regression model with a wild bootstrap and HC3 correction. There is some evidence that increasing the number of taxable costs decreases the settlement rate. ^ Attorney advertising routinely targets tort victims. In the third essay, a theoretical model is developed which incorporates advertising intensity and litigation costs. Since advertising induces victims to bring suit, it increases the level of injurer care. However, when victims bring suit, litigation costs are incurred. At the optimum, the marginal benefit of deterrence equals the sum of the marginal costs of litigation and advertising. It is shown that blanket prohibitions on attorney advertising are suboptimal. Despite the widespread use of attorney advertising, it is unclear whether firms are currently advertising excessively.