4.3 — The Standard of Care

# 4.3 — The Standard of Care
## ECON 315 • Economics of the Law • Spring 2021
### Ryan Safner Assistant Professor of Economics <a href="mailto:safner@hood.edu">safner@hood.edu</a> <a href="https://github.com/ryansafner/lawS21">ryansafner/lawS21</a> <a href="https://lawS21.classes.ryansafner.com"> lawS21.classes.ryansafner.com</a>

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# Outline

### [Standard of Care](#3)
### [The Effect of Court Errors](#)

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# Standard of Care

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# Standard of Care

- So far, we have been assuming that the legal standard of care is set to the efficient level
`$$x^l=x^\star$$`
- In some cases, this is what courts actually try to do
]

# U.S. v. Caroll Towing Co.

- Several barges tied together to piers in NY Harbor

- Defendant’s tugboat was hired to tow one out to harbor
  - Crew readjusted the lines to free the barge
  - Done incorrectly, one broke loose, collided with another ship, sank

- Barge owner sued tugboat owner, claiming employees were negligent

- Tug owner claimed barge owner was also negligent (did not have an agent on board the barge)

- Question for court: .hi-turquoise[was it negligent to not have a “bargee” on board?]
]
]
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.center[
![](../images/barges.png)
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# U.S. v. Caroll Towing Co.

1872—1961

U.S. 2nd Circuit Court of Appeals
]
]
]

.right-column[
.smallest[
> “It appears...that there is no general rule...Since there are occasions when every vessel will break away from her moorings, and since, if she does, she becomes a menace to those around her; the owner’s duty...to provide against resulting injuries is a function of three variables:

> “(1) the probability that she will break away; (2) the gravity of the resulting injury, if she does; (3) the burden of adequate precautions.

> “Perhaps it serves to bring this notion into relief to state it in algebraic terms:

> “if the probability be called P; the injury, L; and the burden, B;

> “.hi[liability depends upon whether B is less than L multiplied by P.]”

]
]

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# The Hand Rule

1872—1961

U.S. 2nd Circuit Court of Appeals
]
]
]

- .hi[The “Hand Rule”]: failure to take a precaution constitutes **negligence** if:

`$$\color{green}{B} < \color{red}{L \times P}$$`
 - `$\color{green}{B}$`: cost of precaution (“burden”)
 - `$\color{red}{L}$`: cost of accident (“liability”)
 - `$\color{red}{p}$`: probability of accident

- A particular precaution activity is required to avoid liability if it is .hi-purple[cost-justified]: costs less than the benefit it provides
  - “If a precaution is efficient, you are negligent if you failed to take it”
]

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# The Hand Rule

1872—1961

U.S. 2nd Circuit Court of Appeals
]
]
]

- .hi[The “Hand Rule”]: failure to take a precaution constitutes **negligence** if:

- Ruled in this particular case (*Caroll Towing*) that barge owner was negligent for not having a bargee aboard the barge during the day
]

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# The Hand Rule

- If precaution is continuous variable `$(x)$`, we can think of these as `$\color{green}{MC}$` and `$\color{red}{MB}$` of precaution in our model
  - Burden (B): `$w$`
  - Probability (P) of accidents: `$-p'(x)$`
  - Liability (L) or size of accident: `$A$`
]

--
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# The Hand Rule

.pull-left[
.smallest[
- .hi[The “Hand Rule”]: failure to take a precaution constitutes **negligence** if:

`$$\color{green}{B} < \color{red}{L \times P}$$`

- In our model: negligence if `$\color{green}{w}<\color{red}{-p'(x)A}$`, i.e. if `$x<x^\star$`
]
]

.pull-right[
<img src="4.3-slides_files/figure-html/unnamed-chunk-2-1.png" width="504" style="display: block; margin: auto;" />
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# The Hand Rule

.pull-left[
.smallest[
- .hi[The “Hand Rule”]: failure to take a precaution constitutes **negligence** if:

`$$\color{green}{B} < \color{red}{L \times P}$$`

- In our model: negligence if `$\underbrace{\color{green}{w}}_{\color{green}{MC}}<\underbrace{\color{red}{-p'(x)A}}_{\color{red}{MB}}$`, i.e. if `$x<x^\star$`

- In marginal magnitudes:
  - `$\color{green}{MC}$` of precaution: cost of precaution `$w$`
  - `$\color{red}{MB}$` of precaution: reduced probability of accident `$-p'(x)A$`
]
]

.pull-right[
<img src="4.3-slides_files/figure-html/unnamed-chunk-3-1.png" width="504" style="display: block; margin: auto;" />
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# The Standard of Care

- The hand test is one (efficient!) way courts have tried to set standards of care

- Laws & regulations are another

- Finally: enforce social norms or industry best-practices
]

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# The Standard of Care

.pull-left[
.smallest[
- U.S. courts have consistently *misapplied* the Hand Rule (if their goal is efficiency)

- Efficient level of precaution `$x^\star$` should be based on minimizing **total social cost** of accident
  - This includes **both** harm to victim (.hi-purple[“risk to others”]) and to injurer (.hi-purple[“risk to self”])
  - Social benefit of me driving carefully is reduced risk of harm to pedestrians/bikers *and* to me! 
  - Courts have tended to only count risk to *others* when calculating benefit of precaution `$(PL)$`

]
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.center[
![](../images/caution.jpg)
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# The Standard of Care

.pull-left[
- Hindsight bias
  - After an accident, we assume it was likely to occur
  - Hard to get unbiased probability estimate `$(p)$` of something after it happens (likely to *over*estimate the likelihood)
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.center[
![](../images/caution.jpg)
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class: inverse, center, middle

# The Effect of Court Errors

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# The Effect of Court Errors

.smallest[
- We’ve seen .hi[negligence rules] lead to efficient precaution `$(x^\star, y^\star)$` by both parties

- But .hi[strict liability] leads to efficient activity levels by injurers

- Over the 20th century, strict liability rules became more common (especially for manufacturers)...why?
 - We will examine products liability next class

- The role of information
]
]

# The Effect of Court Errors

- It’s relatively easy (for .blue[Plaintiff]) to demonstrate (1) harm and (2) causation
  - .hi-green[Example]: A Coca-cola bottle explodes and takes out my eye

- Much harder to prove (.red[Defendent’s]) negligence
  - .hi-green[Example]: How can I show Coca-cola was negligent in their bottling process?

]

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# The Effect of Court Errors

.smallest[
- If this is the case, .red[Injurers] might avoid liability altogether...in which case they would have no incentive to take precaution!
  - .hi-green[Example]: Negligence requires **me** to figure out the efficient level of care for Coca-Cola; strict liability only requires **Coca-Cola** to figure out its efficient level of care

- Coca-cola likely has better information about their bottling process than I do
  - May explain why .hi-turquoise[strict liability rules have become more common]

]
.source[*Escola v. Coca-Cola Bottling Co.*, 24 Cal.2d 453 (1944)]
]

]

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# Errors & Uncertainty in Assessing Damages

- .hi[Random mistakes]: damages could be set too high or too low, but on average (cancel out and) are correct
  - Your textbook calls this “uncertainty”

- .hi[Systematic mistakes]: damages are consistently set *incorrectly* on average, consistently too high or too low
  - Your textbook calls this “errors”
]

# Effects Errors & Uncertainty Under Strict Liability

- .red[Injurer] minimizes `$wx+p(x)D$`
  - With perfect compensation, `$D=A$`
  - Leads .red[Injurer] to efficiently minimize total social cost `$wx+p(x)A$` at `$x^\star$`

- .hi-purple[Random errors in damages have no affect on incentives]
  - .red[Injurer] only cares about **expected** level of damages
  - As long as damages correct on average, .red[Injurers] still internalize cost of accidents, and .hi-purple[take efficient precaution and activity level]
]
]

# Effects Errors & Uncertainty Under Strict Liability

.pull-left[
.smallest[
- On the other hand, **systematic errors** will skew .red[Injurer]’s incentives

- .hi-green[Example]: suppose damages are set too low, `$D<A$`
 - New expected level of damages, `$\color{red}{p(x)D}$`, below true `$\color{red}{p(x)A}$`
 - New private cost for .red[Injurer] to minimize: `$\color{blue}{wx+p(x)D}$` at `$x_2$`
 - .red[Injurer] would internalize less than full social cost of accidents, **underinvest** in precaution `$x_2<x^\star$`

- Note if damages were set too high `$D>A$`, opposite would happen (too much precaution)!
]
]

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<img src="4.3-slides_files/figure-html/unnamed-chunk-4-1.png" width="504" style="display: block; margin: auto;" />
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# Effects Errors & Uncertainty Under Strict Liability

- Random errors in setting damages have no effect

- Systematic errors in setting damages skew .red[Injurer’s] incentives in direction of the error
 - If damages set too low, `$D<A$`, precaution will be inefficiently low `$x<x^\star$`
 - If damages set too high, `$D>A$`, precaution will be inefficiently high `$x>x^\star$`
]
]

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# Effects Errors & Uncertainty Under Negligence

- Random errors in setting damages have no effect

- .hi-green[Example]: assume court had again accidentally set too high damages, `$D>A$`

]
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# Effects Errors & Uncertainty Under Negligence

- Random errors in setting damages have no effect

- .hi-green[Example]: assume court had again accidentally set too high damages, `$D>A$`

- Recall negligence is a threshold rule, private cost to .red[injurer] is:
`$$\begin{cases}
p(x)A+wx && \text{if } x<x^l\\
\end{cases}$$`

]
]

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<img src="4.3-slides_files/figure-html/unnamed-chunk-6-1.png" width="504" style="display: block; margin: auto;" />
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# Effects Errors & Uncertainty Under Negligence

- Random errors in setting damages have no effect

- .hi-green[Example]: assume court had again accidentally set too high damages, `$D>A$`

- Recall negligence is a threshold rule, private cost to .red[injurer] is:
`$$\begin{cases}
p(x)A+wx && \text{if } x<x^l\\
wx && \text{if } x \geq x^l\\
\end{cases}$$`

- So assuming the standard is set correctly, small errors in actual damages have no affect on .red[Injurer] precaution!
]
]

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<img src="4.3-slides_files/figure-html/unnamed-chunk-7-1.png" width="504" style="display: block; margin: auto;" />
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# Effects Errors & Uncertainty Under Negligence

- Under a .hi[negligence rule]

- If the court makes a mistake in setting the standard of care, `$x^l$`...
]

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# Effects Errors & Uncertainty Under Negligence

- Under a .hi[negligence rule]

- If the court makes a mistake in setting the standard of care, `$x^l$`...
  - Setting lower standard reduces precaution
]

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<img src="4.3-slides_files/figure-html/unnamed-chunk-9-1.png" width="504" style="display: block; margin: auto;" />
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# Effects Errors & Uncertainty Under Negligence

- Under a .hi[negligence rule]

- If the court makes a mistake in setting the standard of care, `$x^l$`...
  - Setting lower standard reduces precaution
  - Setting higher standard increases precaution

- ....red[Injurer] adjusts precaution **exactly** to whatever the standard is set to
]

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<img src="4.3-slides_files/figure-html/unnamed-chunk-10-1.png" width="504" style="display: block; margin: auto;" />
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# Effects Errors & Uncertainty Under Negligence

- If the court makes **random errors** in choosing a standard `$x^l$`, creates .hi[uncertainty] for the .red[Injurer]
  - or, equivalently, uncertain how court will compare chosen `$x$` with `$x^l$`

- In general, .red[Injurer] being uncertain about whether they might be found liable or not causes them to **undertake excessive precaution**
  - Increased precaution `$wx$` often costs little, whereas increased liability often costs a lot
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# Summing Up Errors Under Different Rules

.smallest[
- Under strict liability
  - failure to consistently hold injurers liable leads to less precaution
  - **random** errors in setting damages have **no effect**
  - **systematic** errors in setting damages skew .red[Injurer] incentives in same direction

- Under negligence
  - **small** errors (random or systematic) in setting damages have **no effect**
  - **systematic** errors in setting the **standard of care** have a 1:1 effect on precaution
]
]

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# Summing Up Errors Under Different Rules

- So this has the following normative implications:

1. When a court can assess damages more accurately than standard of care, strict liability is better

2. When a court can better assess standards, negligence is better

3. When standard of care is vague, court should err on side of leniency (not encourage excessive precaution)
]

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# Bright-Line Rules vs. Standards

.pull-left[
.smallest[
- In our simple model, the economic goal of tort liability is to minimize total social costs (sum of costs of precaution and expected cost of accidents)

- In reality, we also have to consider any given rule’s .hi[administrative costs]

- Tradeoff between rules (like legal standard of care) tailored to individual situations, vs. broad, simple rules that apply to many situations
  - Broad, simple rules are cheaper to create and enforce, but will not create perfect incentives in every situation
  - More specific, detailed, “tailored” rules will be more costly to create and enforce, but will create more efficient incentives

]]

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# Administrative Costs: Negligence vs. Strict Liability

.smallest[
- Under negligence:
  - Longer, more expensive trials (.blue[Plaintiff] needs to demonstrate .red[Defendant] was negligent)
  - But fewer trials! Not every .blue[Victim] has a case, since .red[Injurers] tend to take precautions to avoid liability!

- Under strict liability:
  - Fewer, speedier trials (no need to demonstrate negligence, only harm & causation)
  - But more trials! .blue[Victims] are much more likely to win, and have a stronger incentive to bring lawsuits
]
]
.pull-right[
.center[
![:scale 100%](../images/court1.jpg)
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# Another Point About Information and Errors

- .hi[Negligence with a defense of contributory negligence] was dominant liability rule in common law countries
  - Negligent .red[Injurer] is liable, unless .blue[Victim] was also negligent
  - .hi-green[Example]: car going 60 MPH hits a car going 40 MPH in 25 MPH zone

]

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# Another Point About Information and Errors

.smaller[
- Over the last half century, most U.S. States have adopted .hi[comparative negligence] rules
  - Often via legislation, sometimes through court decisions
  - Appealing from a fairness point of view
  - But we saw *any* negligence rule leads to efficient precaution
  - So why this consistent change?
]
]
.pull-right[
.center[
![:scale 100%](../images/spidermannegligence.jpg)
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# Comparative Negligence and Evidentiary Uncertainty

.smallest[
- .hi[Evidentiary uncertainty]: uncertainty in how court/jury will interpret evidence
  - Given a legal standard for negligence, `$x^l$`...
  - ...and an actual level of precaution chosen, `$x$`...
  - still uncertain whether court will find .red[Injurer] was negligent

- Evidentiary uncertainty leads to over-precaution

- But comparative negligence mitigates this effect!
  - Injurer might only be found *partly* liable (liability shared with victim), so less over-cautious
]
]
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![:scale 70%](../images/evidence.png)
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