by Robert D. Cooter and Ariel Porat. Princeton University Press, 2014. 240pp. Cloth $49.50. ISBN: 978-0-691-15159-5. E-book ISBN: 978-1-400-85039-6.
Reviewed by Stephen Daniels, American Bar Foundation, Chicago, IL. Email: sdaniels [at] abfn.org.
What ultimately happens to the guy with the broken leg? The man whose leg is broken by the negligence of another is one of the simple but effective hypothetical examples used by Robert D. Cooter and Ariel Porat in their book GETTING INCENTIVES RIGHT: IMPROVING TORTS, CONTRACTS, AND RESTITUTION. While the example is theirs, the question is mine, and the answer goes to the heart of the book, the authors’ purpose, and the implications of their argument.
INCENTIVES is a book of theory and synthesis. It is lucidly written, well organized, and concise – just a little over 200 pages of text. It has a clear, straightforward thesis first stated in the very opening sentence “Law should promote the wellbeing of people” (p.1). It is restated in a bit more detail at the end of the Introduction where the authors’ purpose is partially seen: “THIS BOOK HAS THREE MAIN CLAIMS: misalignments in tort law should be removed; in contract law, promisee’s incentives should be improved; and the law should recognize some right of compensation for those who produce unrequested benefits. All three claims could be summarized in one short sentence: private law could, and should, promote social welfare better. To substantiate these three claims, we take the reader on a tour of economic analysis in private law” (p.12, emphasis in original). As influential scholars in the field of law and economics, Cooter and Porat are more than appropriate tour guides.
In the full sense of the term, INCENTIVES is also a provocative work. It is challenging, stimulating, and – depending on one’s take on law and economics and its underpinnings – capable of invoking anger or excitement. Provocative because more than just the promised tour – this is no mere sightseeing tour – Cooter and Porat’s purpose is to lead us to a particular destination. They want to persuade us of the need for what in many respects is a fundamental rethinking of some of the basic tenets of private law and the operation of the civil justice system, a rethinking driven by ideas drawn from the law and economics literature (especially their own contributions to that literature). Underlying this is a more general theme pointing, perhaps, to the ultimate destination – a more minimal state. There is more than a dash of libertarianism here.
For Cooter and Porat the key to law better serving social welfare is to be found in more efficient legal rules. Inefficient rules, they argue, lead to misalignments in incentive structures for actors. Misalignments arise because of the ways in which legal rules handle, on [*395] the one hand, risk, cost, harms or losses, and compensation, and how they handle benefits on the other. Actors (those who may become defendants in tort or contract matters) may over-invest in precautions or be over-deterred by legal rules that do not adequately and appropriately take ALL key factors involved into consideration. Cooter and Porat summarize all key factors as net harm: “The net harm equals the actual harm minus the benefits to others” (p.12). Ignoring net harm may make socially beneficial actions more expensive than they need to be or may even make their cost prohibitive. One example for Cooter and Porat is the claim by some “that high damages for tort liability in the U.S. cause too few doctors to specialize in obstetrics” (p.167). (Although not a book on the issues surrounding medical malpractice, it is a recurring interest and source of hypothetical examples in INCENTIVES.)
At the same time, other actors (those who may become plaintiffs in tort or contract cases) may be under-incentivized to behave in more efficient ways. With torts, for instance, potential plaintiffs may not have sufficient incentives to avoid accidents or mitigate the subsequent costs; or with contracts, promisees may not have sufficient incentives to help promisors fulfill their promises or to avoid over-reliance on the promise. In short, the problem for Cooter and Porat is that current tort law and current contract law have inefficient incentive structures given the ways each handles actual or potential wrongdoing. In both situations a key part of the problem deals with under-incentivizing and over-compensating the victims of wrongdoing. There is, of course, the nagging question of whether victims actually act as Cooter and Porat assume. Their examples may be effective for their purposes, but are they realistic?
In addition, actors (perhaps those who might be the defendants above) are not sufficiently incentivized by the law to do things that clearly benefit social welfare (actions with positive externalities). Here there may be misalignments in the way in which the law currently works or simply because of the absence of any relevant rules supporting beneficial activities. Positive externalities are especially important for Cooter and Porat and they devote the entire third section of INCENTIVES, Restitution and Positive Externalities, to this concept. In many respects, the earlier discussions are a prelude to – a foundation for – their arguments about the importance of positive externalities, which are the tour’s immediate destination.
Judges – in the common law tradition – are crucial for Cooter and Porat in realigning incentives. In effect, Cooter and Porat’s argument is not just about the kinds of changes in the law that are needed, but that judges should be making many, if not most, of them. In other words, theirs is also an argument about judging and the principles that should guide decision-making. It is an argument about the role of judges, who would very much be policy-makers. Cooter and Porat say that judges should take ALL key factors into consideration in making decisions and this has a broad meaning for them, covering what they call the foreground (the situation of the immediate actors) and the background (society and social welfare generally), and the latter appears be the more important. [*396]
Turning to some specifics, Cooter and Porat argue for a new and quite different approach to breach of contract. The title of the book’s second section, Contract and Victims’ Incentives, reflects the problem as they see it. The law provides too few incentives to promisees – the victims in breach of contract situations – to help the promisor complete his or her obligations under the contract. Instead, there are too many incentives leading the victim to do little or nothing to help the promisor and to over-rely on the promises made (over-reliance could increase the amount of compensation to be paid if the contract is breached). The law’s current state, then, causes misalignment and so Cooter and Porat want to eliminate, or at least mitigate, compensation as a way of maximizing the value of contracts through better chances for completion (p.90).
Their ideal solution, the subject of chapter 7, would be something quite new, “Anti-insurance.” Anti-insurance realigns incentives by functionally making each party internalize the risks and costs. Cooter and Porat see it as “the perfect market solution for internalizing risk” (pp.125-126). With anti-insurance the promisee sells, at some amount much lower than the contract’s value, to a third party his or her right to sue for breach of contract. This provides the promisee with the incentive to help the promisor and not over-rely on completion since the promisee can no longer sue for losses due to breach (as is the case currently). The promisor still has the incentive to fulfill the contract’s obligations because the third party can now sue for the breach. Short of this, Cooter and Porat argue for the use of diminishing value contracts in which compensation for breach is reduced as more of the obligations are fulfilled.
Cooter and Porat would also fundamentally change the law of torts, if for no other reason than their view of compensation to victims. Compensation to victims for injuries caused by others has always been a key part of tort law just as compensation for breach is a key part of contract law. For them compensation is a problem causing misalignment. They say, “In a traditional economic analysis of law, however, compensating victims typically erodes their incentives to reduce the probability or magnitude of harm. Arresting the erosion of victims’ incentives requires reducing damages” (p.195). The victim “can reduce the activity that exposes him to risk, increase the care with which he does the risky activity, or search for the cheapest way to repair damage after it occurs” (p.195). In tort situations as in contract situations Cooter and Porat believe the law favors victims in ways that do not serve the social welfare.
Cooter and Porat are well aware that their interest in reducing damages “undermines the legal goal of compensating victims” (p.206). Insurance, private and public, they state, is extensive and is “more reliable and efficient [in the] compensation of victims than liability ... we believe that the goal of compensation should diminish in importance for law as insurance expands. More complete insurance markets free liability law from the need to compensate victims, so liability law can minimize social costs by various means” (p.206).
For the guy with the broken leg this could mean less compensation than is needed to effect recovery or even none [*397] at all, unless he has and can afford private insurance that will cover his needs or qualifies for a publicly funded program that will step in. This may well not be the case; and if not, it is probably too much to assume that the situation would change in the foreseeable future in light of the partisan divide over the Affordable Care Act, the expansion of Medicaid, and the availability of health care. Cooter and Porat’s approach can seem quite austere. The plight of the individual victim with a broken leg caused by someone else’s negligence is not, apparently, the most important thing. Broader factors serving the social welfare may be more important than the immediate plight of an individual.
This leads to what is perhaps the most provocative and interesting part of INCENTIVES – its third and final section, Restitution and Positive Externalities. It builds on the key theoretical themes of the two previous sections on the misalignments of incentives and the need to consider all relevant factors in both the foreground and the background in realigning incentives. This section opens, however, with Chapter 9, A Public Goods Theory of Restitution, on a very different topic than the earlier discussions of torts and contracts – public goods. It shows some of the broader implications of Cooter and Porat’s ideas on realigning incentives and the importance of positive externalities. It also brings to the forefront the underlying libertarian theme that animates much of Cooter and Porat’s guided tour.
Cooter and Porat open Chapter 9 by saying; “The law seldom rewards an individual who creates an unrequested benefit for others. So private production of public goods is deficient” (p.151). Realigning incentives around positive externalities would remedy this and allow private activities that could even displace direct governmental activities. To make the realignment work, the law will need to create a way for benefactors to be paid for their actions: “A duty of restitution for unrequested benefits to several recipients finances the private provision of public goods” (p.163). Cooter and Porat do say that theirs is a “potentially revolutionary solution to the undersupply of public goods [that] will require legislation, not just new court decisions” (p.208).
Cooter and Porat see this solution as one with limits. Forced restitution to benefactors should occur only in two situations: “Transition costs preclude the benefactor from obtaining consent of the recipients in advance, and each of the recipients indisputably benefits more than his share of the costs (Pareto improvement). The benefactor’s recovery should equal costs incurred plus a fraction of the benefits conveyed” (pp.163-164). Left insufficiently developed is the reason for not respecting autonomy and requiring consent for what in effect is no different than a tax. Nor is consent required for the choice among potential alternatives or for prioritizing one kind of benefit as opposed to another kind.
The other two chapters in the book’s last section return to more familiar territory – torts and contracts, but especially torts – to play out the more relevant implications of Cooter and Porat’s arguments on positive externalities and compensation for unrequested benefits. In doing so, Cooter and Porat add another important element to the [*398] consideration of net harm and all factors judges should be considering. Chapter 10, Liability Externalities and Mandatory Choices argues for “adjusting liability for accidents in light of the effects on others beside the accidental harm to victim” (p.11). The guy with the broken leg plays a starring role in a hypothetical example at the very beginning of the chapter. The example has the leg broken by a negligent driver who hits the man; alternatively a doctor breaks the leg and the man is the doctor’s patient. Otherwise, everything is the same in terms of severity of injury and the needed treatment.
Cooter and Porat use the example to ask the question: “Does efficiency require adjusting damages in light of externalities, so the driver pays more and the doctor pays less?” The answer for them is yes under economic principle, but not under current legal principles (p.164). The reason for the yes answer is positive externalities. They say, “Law should encourage activities with positive externalities. Reducing liability for doctors would encourage activities that need encouragement” (p.166). This, however, is likely to be of little comfort to the guy with the broken leg.
Cooter and Porat admit that asking judges to do this may be going a bit too far. But the basic principle of encouraging activities with positive externalities, they say, can be used in assessing net harm in the handling of medical malpractice cases. However, as they point out in a footnote (p.179 fn 5), their discussion “does not compare the negative and positive externalities of doctors in general.” The reader is left without a crucial element of net harm needed to assess the reasonableness of the proposed changes in the law dealing with medical malpractice. Instead, they assume there are some fields in which the positives outweigh the negatives. One of them, they say, is obstetrics and they claim that there is much research to support this assumption. The reader is then referred to the sources in a later footnote, but it is not clear how those sources support the claim being made. In short, the assumption about the balance of externalities is somewhat problematic and this is important in light of their idea of net harm and because of their statement that “[l]iability law biases doctors against specializing in these fields” (p.179 fn 5).
Liability law does this through what they call “liability externalities,” unbalanced externalities caused by the way in which the market and negligence law work. “Doctors often create benefits for patients that exceed their fees in total and at the margin” (p.169) and they provide benefits to society more generally. In the current handling of medical malpractice cases, these positive externalities are not considered. Additionally, courts sometimes make mistakes and hold doctors liable for mistakes even if the mistake is not negligent, exposing doctors to threat of paying damages. Unfortunately, the empirical grounding for this claim is rather weak in light of its importance for Cooter and Porat’s argument. In their view, it “will cause them [doctors] to perform fewer treatments that risk liability and discourage them from specializing in fields with high liability. Lowering damages will decrease these undesirable effects and benefit patients” (pp.169-179).
At the end of the chapter Cooter and [*399] Porat respond to the potential criticism that their argument for lower damages – especially for obstetricians, their focus in the chapter – undermines tort law’s traditional goal of compensating the victim. Again, they argue that full compensation creates misalignments. “Excessive liability [meaning more than is economically efficient] for childbirth discourages doctors from specializing in obstetrics and encourages them to engage in defensive medicine, which makes patients suffer. Given these facts, the potential victims may prefer to provide for compensation by other means than tort law, such as social or private insurance” (p.186). This assumes, of course, that such an alternative is even possible. Again, Cooter and Porat’s approach can be quite austere.
While not implying anything about what Cooter and Porat might say, one can’t help but wonder about the other possible applications of this idea of law encouraging positive externalities by lowering the liability faced by wrongdoers. Recently BP has been running television spots about its contributions to the American economy. The video is set in Alaska along side an oil pipeline, with a BP official explaining the large number of jobs throughout the lower 48 states (200,000+) created by BP’s activities in Alaska. If there is a damaging break in that pipeline (or a major oil spill at one of BP’s offshore operations), should the damages faced by BP if the break is negligent be reduced to reflect the positive externalities its operation creates?
The last chapter in INCENTIVES adds one more positive externality to the net harm judges should consider in decision-making – harm to the wrongdoer in way of non-legal sanctions. This builds on the logic of Chapter 2 in the book’s first section, The Injurer’s Self-Risk Puzzle. Non-legal sanctions pose an important risk of harm to the wrongdoer and they can function as positive externalities when they benefit others. Cooter and Porat note three possible ways non-legal sanctions do so. They “may convey INFORMATION about the wrongdoer that enables potential victims to escape injury;” they “may ADVANTAGE COMPETITORS of the wrongdoer;” and they “may DETER the wrongdoer or other potential wrongdoers from causing future injures” (p.191, emphases in originals). To reduce social costs and enhance the wrongdoer’s incentives “courts should award compensatory damages minus the benefits of the non-legal sanction” (p.188).
As with the previous chapter, Cooter and Porat end this one with the reminder that their proposals would undermine tort law’s traditional goal of compensating victims. Again they point to insurance – private or public – as the alternative for victim compensation “so liability law can minimize social costs by various means, including deducting non-legal sanctions from damages” (p.206). This is of little comfort to someone like the guy with a broken leg, especially if he has been injured by someone, like a doctor, who arguably provides positive externalities benefiting the social welfare.
Highlighting the guy with a broken leg and taking him along on Cooter and Porat’s tour raises an important question – who benefits by the substantial changes in the law proposed by Cooter [*400] and Porat? Aside from some general possibility that everyone benefits by enhancements to the social welfare, it’s not him. This question points to the larger context for INCENTIVES. Even though INCENTIVES is very much a book of theory, it cannot stand outside of the current arguments surrounding the functioning of private law, especially tort law and tort reform. As Thomas Burke notes, those arguments “are highly partisan” with Republicans on one side leading the efforts for change (typically favoring the cause of those who get sued) and Democrats trying to hold the line on the other (typically favoring those doing the suing). At their heart, he says, the arguments are about distributional justice. They are about who gets what, when, how, and the government’s role therein (Burke, 2002, p.27).
Cooter and Porat stay above the partisan debates in INCENTIVES, but their deep concern with tort law – especially with regard to medical malpractice – speaks directly to the issues involved. Getting incentives right is about realignments – changes in the law – that will affect who gets what, when, how, and government’s role. Although the symmetry is rough to be sure, Cooter and Porat’s arguments align more with those pushing for change than those resisting it (as the plight of the guy with the broken leg suggests).
This is especially so with regard to medical malpractice, but with other areas as well. Cooter and Porat’s arguments, for instance, would leave little or no place for punitive damages or for pain and suffering damages (both key targets for reformers, especially in medical malpractice cases). Two books cited by Cooter and Porat – Tom Baker, THE MEDICAL MALPRACTICE MYTH and Neil Vidmar, MEDICAL MALPRACTICE AND THE AMERICAN JURY: CONFRONTING THE MYTHS ABOUT JURY INCOMPETENCE, DEEP POCKETS AND OUTRAGEOUS DAMAGE AWARDS – would help provide the reader with a broader context. William Haltom and Michael McCann’s DISTORTING THE LAW: POLITICS, MEDIA, AND THE LITIGATION CRISIS, especially Part One: Contesting Legal Realities, provides a very interesting overview of the politics of tort reform and the groups involved.
Finally, there is one other relevant context – the rise and successes of the conservative legal movement. Steven Teles’ THE RISE OF THE CONSERVATIVE LEGAL MOVEMENT: THE BATTLE FOR CONTROL OF THE LAW tells the story well, and law and economics plays an important part. Teles devotes two entire chapters to law and economics scholars and scholarship, and he is careful in noting that law and economics is not simply some wholly owned subsidiary of the conservative legal movement. Instead he sees a symbiotic relationship of sorts – support coming to schools and scholars from conservative interests and those interests, in turn, looking for useful ideas that could support conservative causes. He appropriately notes: “Many of the field’s most prestigious practitioners are quite liberal and motivated primarily by a desire to make law an empirical discipline, rather than an instrument of conservative or libertarian ideology. That said, there can be no doubt that many conservatives, especially foundation patrons, saw in law and economic a powerful critique of state intervention in the economy, and a device for gaining a foothold in the world of elite law schools” (Teles, 2008, [*401] p.90).
By no means is this a suggestion that Cooter and Porat and INCENTIVES can or should be seen as a piece of this movement and dismissed. They are serious scholars and INCENTIVES is an important work that should be of interest to any political scientist interested in the American legal system. Still, as the guy with the broken leg would tell you, theoretical arguments do not exist in some apolitical, abstract space.
Baker, Tom. 2005. THE MEDICAL MALPRACTICE MYTH. Chicago: University of Chicago Press.
Burke, Thomas. 2002. LAWYERS, LAWSUITS, AND LEGAL RIGHTS: THE BATTLE OVER LITIGATION IN AMERICAN SOCIETY. Berkeley: University of California Press.
Haltom, William and Michael McCann. 2004. DISTORTING THE LAW: POLITICS, MEDIA, AND THE LITIGATION CRISIS. Chicago: University of Chicago Press.
Teles, Steven. 2008. THE RISE OF THE CONSERVATIVE LEGAL MOVEMENT: THE BATTLE FOR CONTROL OF THE LAW. Princeton: Princeton University Press.
Copyright 2014 by the Author, Stephen Daniels.