Suppose that for a particular type of accident, only 50% of injurers expect to be successfully sued. To create an incentive for efficient precaution, punitive damages should be...

Question

Suppose that for a particular type of accident, only 50% of injurers expect to be successfully sued.  To create an incentive for efficient precaution, punitive damages should be...

BlackTom AI · Accepted Answer

We begin by restating the scenario to anchor the reasoning: for a particular type of accident, only 50% of injurers expect to be successfully sued, so the punitive damages should be set to create an incentive for efficient precaution.
Option 1: equal to compensatory damages. This choice aligns with standard deterrence theory under limited liability or imperfect litigation certainty: when the probability of being sued is less than 1, punitive damages set at the level of compensatory damages can raise the expected cost of precaution to a level that induces efficient safety investment, given the 50% chance of liability. In other words, punishing to the same amount as actual damages can achieve the desired deterrent effect when litigation risk is uncertain.
Option 2: twice as much as compensatory damages. While increasing punitive damages above compensatory damages can strengthen deterrence, in this specific setup with only a 50% expectation of litigation, doubling the compensatory damages would typically overstate the needed deterrent per the conventional calibration for imperfect enforcement. It may overpenalize and distort incentives, potentially causing excessive precaution relative to the social optimum.
Option 3: willful and wanton. Labeling damages as willful and wanton represents a heightened standard often associated with stricter fault requirements, but the premise here is to calibrate punitive damages to create efficient precaution given a 50% sue rate. Simply invoking a willful and wanton designation does not specify a monetary level and may not directly address the probabilistic deterrence mechanism described in the scenario. This option describes a category rather than a quantifiable deterrent amount, making it less precise as an incentive tool in this context.
In summary, option 1 provides a straightforward, money-level equalization to compensatory damages that corresponds to balancing expected costs under a 50% sue probability, whereas options 2 and 3 either overstate or misalign with the given probabilistic deterrence framework.

SU25 ECON 522 001 ZFF Self Quiz, Week 4 part 3

Suppose that for a particular type of accident, only 50% of injurers expect to be successfully sued. To create an incentive for efficient precaution, punitive damages should be...

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