Injury and Accident Law
The Efficiency and Equity of Nonpecuniary Damages
Critics of the tort system have particularly questioned the deterrence benefits of nonpecuniary damages (punitive awards and compensatory awards for pain and suffering). They argue that large nonpecuniary damages cannot provide useful incentives for precaution because they are awarded in a subjective, arbitrary, and unpredictable way, with little connection to the actual harm or, in the case of punitive damages, to the character of the injurer’s conduct. In that view, such awards are inequitable as well as inefficient. Indeed, the Supreme Court has ruled that punitive damages violate the Due Process Clause of the Constitution if they are not “both reasonable and proportionate to the amount of harm to the plaintiff and to the general damages recovered.”13
The accuracy of that characterization of nonpecuniary damages is a matter of some debate. Supporters of the status quo argue that large awards for punitive damages can promote efficiency by sending appropriate signals for precaution in regard to torts that have a significant probability of escaping detection and judgment. Moreover, they say, large punitive damages can serve equity by punishing egregious behavior on the part of large injurers. Supporters further argue that noneconomic losses such as pain and suffering are as real as economic losses (albeit harder to quantify), so setting artificial limits on awards for such losses may undercompensate some injury victims and may produce some product prices that are inefficiently low because they do not fully reflect the products’ true risks.
Economists have tried to shed empirical light on the question of the efficiency of tort costs, focusing primarily on punitive damages. However, the limited data have not yielded a compelling answer. A 1998 study investigated the deterrent effects of punitive damages by comparing the four states that prohibit such damages with the 46 states (and District of Columbia) that allow them. The study found no statistically significant differences in deterrent effects—and in many cases, differences of the “wrong” sign—for more than a dozen indicators of environmental and safety risks.14 The author of the study posited two arguments to explain the lack of an effect: that punitive damages are awarded too randomly to influence behavior, and that federal regulations and market forces other than liability are stringent enough to leave no room for additional deterrence. However, two follow-up papers suggested that the statistical results of that study could merely reflect limitations of the data. Those papers argued that four states do not provide a strong basis for comparison and that punitive damages could be serving their intended purpose of deterring the most egregious torts—which by definition are relatively rare—without having a discernable impact on overall injury rates.15
In short, the current state of data and economic analysis do not allow CBO to judge whether the costs of the tort system are efficient or excessive on the whole.16 What is clear, however, is that those costs are large enough to be significant for the U.S. economy. That fact helps raise the question of whether changes to the current tort system could reduce the system’s costs without undermining its benefits.
13. State Farm Mut. Automobile Ins. Co. v. Campbell, 538 U.S. ___ (2003).
14. The indicators included toxic-chemical accidents, toxic-chemical accidents involving injury or death, reductions in releases of toxic chemicals (to surface waters and to all media), total deaths, “medical misadventure deaths,” total insurance premiums, and premiums for medical malpractice, product liability, and other liability. See W. Kip Viscusi, “The Social Costs of Punitive Damages Against Corporations in Environmental and Safety Torts,” Georgetown Law Journal, vol. 87, no. 2 (November 1998), pp. 285-345.
15. Theodore Eisenberg, “Measuring the Deterrent Effect of Punitive Damages,” pp. 347-357, and David Luban, “A Flawed Case Against Punitive Damages,” pp. 359-380, both in Georgetown Law Journal, vol. 87, no. 2 (November 1998).
16. A 2002 report by the President’s Council of Economic Advisors investigated the burden of liability costs on the economy, but it did not provide new information about the incentive effects of tort liability. Rather, the report sketched three alternative scenarios, each of which assumed that certain categories of the direct costs estimated by Tillinghast have no impact on the behavior of potential injurers and are thus “excessive.” See Council of Economic Advisors, Who Pays for Tort Liability Claims?: An Economic Analysis of the U.S. Tort Liability System (April 2002).