Luppi and Parisi, ‘Optimal liability for optimistic tortfeasors’

Abstract:
As Alicke and Govorun (The self in social judgment, Psychology Press, New York, 2005, p 85) observed, ‘most people are average, but few people believe it’. Optimism and other forms of inflated perception of the self lead parties to exercise suboptimal precautions when undertaking risky activities and often undermine the incentive effects of tort rules. In this paper, we show that the presence of optimism undermines several critical assumptions, upon which law and economics scholars have relied when modeling the incentive effects of tort law. We construct a model representing the incentives of ‘optimistic’ tortfeasors and victims, and consider mechanisms for mitigating the effects of biased decision-making. We show that in the presence of optimism, comparative negligence rules are preferable to contributory negligence rules (ie, the traditional equivalence between contributory and comparative negligence does not hold). Further, we discover the surprising conclusion that the most effective way to correct optimism may often simply be to ‘forgive’ it, shielding optimistic individuals from liability, rather than holding them liable for the harms they cause.

Barbara Luppi and Francesco Parisi, Optimal liability for optimistic tortfeasors. European Journal of Law and Economics, June 2016, Volume 41, Issue 3, pp 559-574.

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