Punitive Damages for Deterrence: When and How Much?

Abstract

An economic model of deterrence is used to derive two prescriptions for punitive damages that apply to economically motivated defendants, including businesses. To recover punitive damages, a plaintiff should have to prove a gross shortfall from the legal standard by the defendant that would be profitable if liability were limited to compensatory damages. In a word, "incentive inadequacy" should be proven. A key element in the proof is establishing the existence and extent of enforcement error. If the court finds that punitive damages are to be awarded, the punitive multiple should be set equal to the reciprocal of the enforcement error. These rules, if adopted, would provide incentives for efficient deterrence and would have significant consequences for current legal practice, including making the ratio rule more definite, lowering the ratios actually allowed, and largely eliminating a defendant's net worth as a consideration for setting punitive damages.

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