Decoupling Liability: Optimal Incentives for Care and Litigation

Abstract

A decoupled" liability system is one in which the award to the plaintiff differs from the payment by the defendant.The optimal system of decoupling makes the defendant's payment as high as possible.Such a policy allows the award to the plaintiff to be lowered, thereby reducing the plaintiff's incentive to sue --and hence litigation costs --without sacrificing the defendant's incentive to exercise care.The optimal award to the plaintiff may be less than or greater than the optimal payment by the defendant.The possibility of an out-of-court settlement does not qualitatively affect these results.If the settlement can be monitored, it may be desirable to decouple it as well.

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