Tort-Related Risk Costs and the Hand Formula for Negligence
Abstract
This Article analyzes the implications of the following reality for the first-best-allocative-efficiency of the Hand formula for negligence - viz., the fact that, in addition to affecting the mean of the distribution of possible accident-or-pollution losses (i.e., the weighted-average-expected loss), accident-or-pollution-loss avoidance-moves will usually affect the dispersion or variance of that distribution and hence the sum of the accident-or-pollution-loss-related risk costs that potential injurers and potential victims bear. The Article begins by pointing out that the standard Hand formula for negligence does not take account of this reality and that this omission will result in (1) its deeming non-negligent the rejection of some (risk/risk-cost)-reducing avoidance-moves whose private cost to the potential injurer was lower than the total weighted-average private benefits their execution should have been expected to confer on the relevant loss' potential victims and (2) its deeming negligent the rejection of some (risk/risk-cost)-increasing avoidance-moves whose private costs were higher than the net weighted-average private benefits they should have been expected to confer on the relevant loss' potential victims. The Article then reports that the standard academic analysis of the first-best-allocative-efficiency of the Hand formula (of its allocative efficiency on otherwise-Pareto-perfect assumptions) has failed to note this problem and that - when asked to comment on this problem - scholars in the field have unanimously responded by claiming that it could be fixed straightforwardly by adding a change in risk cost term to the right-hand side of the standard Hand inequality. Next, the Article argues that this response is both underspecified and overly optimistic. It shows that this response is underspecified in two respects: (1) it does not specify whether the change in risk cost term is a change in potential-victim risk cost term, a change in potential-injurer risk cost term, or (the correct variant) a change in the sum of potential-victim and potential-injurer risk costs term, and (2) it does not recognize that, when the potential injurer and the potential victims are not equally risk-averse and/or do not have portfolios of other risks that have the same impact on the contribution of the relevant accident-or-pollution-loss risk to the total risk they face, the impact of the avoidance-move in question on the sum of their risk costs will almost always depend on whether the injurer or the victim will be liable for any loss that eventuates (more specifically, on their weighted-average-expected prediction of how any actual loss will be allocated between them). The Article demonstrates that the response of the Law & Economics scholars with whom I have discussed this issue is also overly optimistic in two respects. Although in many categories of cases, it will be possible to create a first-best-allocatively-efficient Hand-type formula for negligence straightforwardly by adding (subtracting) a decrease (an increase) in the sum of potential-injurer and potential-victim risk costs term to (from) the right-hand side of the standard Hand inequality in which the change in risk costs in question is measured on a placement-of-liability assumption that matches the liability-assignment that the use of the revised Hand formula in question will generate, in other categories of cases no such straightforward alteration in the Hand formula will induce the potential injurer to make allocatively-efficient avoidance-decisions in an otherwise-Pareto-perfect world. Thus, as the Article shows, in one category of cases, the alteration in the Hand formula that will induce the potential injurer to make a first-best-allocatively-efficient avoidance-decision will be paradoxical rather than straightforward - viz., will involve the inclusion of a victim-liable change in total risk costs term to the right-hand side of the standard Hand inequality that yields the conclusion that the injurer will be liable for (negligent in) rejecting the avoidance-move in question and secures allocative efficiency not by inducing the potential injurer to avoid but by rendering allocatively efficient his continuing rejection of the avoidance-move in question. Moreover, as the Article shows, in another category of cases, it will not be possible to induce the relevant potential injurer to make a first-best-allocatively-efficient avoidance-move decision by adding or subtracting a change in risk costs term of any type to or from the right-hand side of the standard Hand inequality. The Article concludes by arguing that (1) at least in our type of liberal, rights-based society, the internally correct answer to any common-law legal-rights question is the answer that secures the liberal corrective-justice rights of the parties to the dispute; (2) in cases in which the alteration in the Hand formula that would induce the potential injurer to make an allocatively-efficient avoidance-decision is paradoxical, that alteration could not be justified in corrective-justice terms and would therefore be morally impermissible for a court to make and apply retrospectively; (3) unless specifically authorized to do so by a constitutional provision or by a plebiscite on the issue, it would also be morally and constitutionally impermissible for a legislature to authorize courts to promulgate non-corrective-justice-based, allocatively efficient tort doctrines for prospective use only; and (4) rights-considerations aside, there are important reasons to doubt the desirability of legislatures' authorizing bodies that also engage in adjudication to legislate in this way. Some of these conclusions are important for straightforward, practical reasons. For example, I do think that parties to tort suits should be able to convince judges to declare that the negligence of a defendant's rejection of any avoidance-move depends not only on the private cost of that move and the amount by which it would reduce weighted-average-expected actual, private accident-or-pollution losses but also on the impact that the move would have on the sum of the potential injurer's and potential victims' tort-related risk costs. Relatedly, I do think that in those (admittedly-few) cases in which the rejected avoidance-move's tendency to reduce the risk costs in question critically affected its negligence (properly defined) - i.e., made the rejection of the avoidance-move in question negligent when it would not otherwise have been so, the plaintiff should be able to convince the trier-of-fact to declare negligent the rejection of an avoidance-move whose rejection would be deemed non-negligent by the traditional Hand formula. Similarly, I do think that in those (admittedly fewer) cases in which the rejected avoidance-move's tendency to increase the risk costs in question critically affected its negligence (properly defined) - i.e., made the rejection of the avoidance-move in question non-negligent when it otherwise would have been negligent, the defendant should be able to convince the trier-of-fact to declare non-negligent the rejection of an avoidance-move whose rejection would be deemed negligent by the traditional Hand formula. I also think that defendants should be able to use this Article's discussion of the implications of the corrective-justice orientation of the common law for the permissibility of common-law judges' promulgating allocatively efficient doctrines that cannot be said to instantiate our society's corrective-justice commitments to convince courts not to engage in such legislation. However, I want to close by suggesting that this Article's most important contribution may be to academics and the policy audience in general. By pointing out various deficiencies in the Law & Economics analysis of the Hand formula that virtually all Law & Economics analyses of all issues share - viz., (1) a failure to analyze competently the allocative efficiency of common-law doctrines or statutory provisions (usually, though not in this instance, a failure to execute second-best or third-best allocative-efficiency analyses), (2) a failure to analyze competently the prescriptive-moral relevance of allocative-efficiency conclusions, and relatedly (3) a failure to analyze competently the relevance of allocative-efficiency conclusions for judicial and legislative decision-making. This Article may help academics improve their work and make the policy audience more critical readers of and better assessors of the reliability and relevance of the conclusions generated by standard Law & Economics analyses.