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American Law and Economics Review V4 N1 2002 (18-43)
© 2002 American Law and Economics Association

Article

Welfare Implications of Costly Litigation under Strict Liability

Keith N. Hylton

Boston University

Send correspondence to: Keith N. Hylton, Boston University, School of Law, 765 Commonwealth Avenue, Boston, MA 02215; E-mail: knhylton{at}bu.edu

Abstract

This article examines a model of strict liability with costly litigation and presents conditions under which (1) potential injurers take optimal precautions, (2) increasing the cost of litigation enhances precaution and social welfare, (3) the optimal level of liability exceeds the compensatory level, and (4) increasing the rate of settlement enhances social welfare. The results have implications for controversies surrounding fee shifting, optimal damage awards (e.g., punitive damages), and the social desirability of settlement. The most striking implication is that fee shifting in favor of prevailing plaintiffs is socially desirable in low-transaction-cost settings.


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