An Information-Production Theory of Liability Rules

The negligence-versus–strict liability debate is over in tort law, and negligence has clearly won. Yet the fact that our accident-compensation system is fault based continues to attract much opposition in popular sentiment and academic circles. Standard economic analysis views strict liability as preferable to negligence because it is easier to administer and leads to better risk reduction: strict liability induces injurers not only to optimally invest in precaution but also to optimally adjust their activity levels. Standard analysis thus views the prevalence of negligence as unjustifiable on efficiency grounds. This Article challenges the conventional wisdom and clarifies an efficiency rationale for negligence by spotlighting the information production function of tort law. Tort litigation affects behavior not just directly through imposing sanctions but also indirectly through producing information on how the disputants behaved. Third parties can then use information from litigation to decide whether to avoid the defendant or not. And the choice of liability rules dictates the magnitude and scope of these informational effects: negligence produces more valuable information on the behavior of market actors than strict liability does. Litigation under negligence produces granular information on whether the defendant could have reasonably avoided the harm, how she fares relative to others in her profession, and so on. Such information, to the extent it becomes public, allows outside observers to infer whether the past accident is indicative of the defendant’s future behavior or not, which in turn affects their willingness to do business with her going forward. A physician found negligent may lose future patients, a seller failing the consumer-expectations test in products liability may lose future consumers, and so on. Litigation under strict liability produces much coarser information— namely, that a harm occurred as a result of the defendant’s activity. It rarely provides outside observers with information on the competence or integrity of the defendant vis-à-vis her peers. The efficiency rationale for negligence thus stems from facilitating more robust market discipline. In contrast to what influential accounts in economic analysis suggest, negligence does affect the activity levels of potential injurers, albeit from the demand side: by warning third parties, it reduces market demand for the services of risky actors. This Article explains how information from litigation translates to reputation, identifies the circumstances under which these reputational effects are more (or less) pronounced, and uses the reputational perspective to reevaluate timely debates such as the desirability of secret settlements or how to set the liability standard for autonomous-vehicle accidents