Punitive Damages: An Economic Analysis

Abstract

Punitive damages law is one of the more controversial features of the American legal system. Trial and appellate courts have been struggling for many years to develop a coherent set of principles for assessing when punitive damages should be awarded, and at what level. In this Article Professors Polinsky and Shavell use economic reasoning to provide a relatively simple set of principles for answering these questions, given the goals of deterrence and punishment. With respect to the deterrence objective, upon which their Article focuses, their main point is that punitive damages ordinarily should be awarded if, but only if, an injurer has a significant chance of escaping liability for the harm he caused. When this condition holds, punitive damages are needed to offset the deterrence-diluting effect of the chance of escaping liability. (They mention as well a deterrence rationale for punitive damages that does not rest on the possibility of escape from liability -- that punitive damages may be needed to remove the socially illicit gains that individuals obtain from malicious acts.) Professors Polinsky and Shavell also discuss the tension between the implications of the deterrence objective and present punitive damage law, including the law's emphasis on the reprehensibility of a defendant's conduct and on a defendant's wealth. With respect to the punishment objective, Professors Polinsky and Shavell stress that the imposition of punitive damages on corporations may fail to serve its intended purpose (although the imposition of punitive damages on individual defendants accomplishes punishment in a straightforward manner). This is primarily because the payment of punitive damage awards by corporations often does not lead to greater punishment of culpable employees, but instead punishes the corporation's shareholders and customers.