The goals of the liability system are twofold-to compensate those who are injured in accidents and to deter negligent behavior. Recent research, however, suggests that the current liability system achieves neither of these objectives, writes Hoover Institution Research Fellow Daniel P. Kessler in a new Essay in Public Policy.
In The Economic Effects of the Liability System, Kessler provides background on the operation of the liability system and discusses some of the likely causes of the liability system's poor performance: high transaction costs and errors in the assignment of liability. Furthermore, he shows how even a perfectly functioning liability system can lead doctors and hospitals to practice defensive medicine-to use treatments with minimal medical benefit out of fear of legal liability-due to the effects of health insurance on patients' and providers' incentives to use costly precautionary tests and procedures.
Kessler focuses on how liability-reducing reforms to tort law affect productive efficiency. He cites research that compares trends in the productivity of states that adopted reforms to trends in states that did not. In general, this research suggests that reductions in the level of liability improve productive efficiency. He notes, however, that even if these reforms improve efficiency, they may not improve the performance of the system in terms of the compensation goal.
Kessler concludes with a discussion of the effects of untested reforms, including some that would radically change the assignment of responsibility for accidental injuries. Daniel P. Kessler is an associate professor at the Stanford Graduate School of Business and a research fellow at the Hoover Institution. In addition, he is a faculty research fellow at the National Bureau of Economic Research and an associate at the Center for Health Policy at Stanford. His work has been featured in the Wall Street Journal and Business Week.
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