ABSTRACT :: The economic models of bargaining and tort law have not been integrated into a coherent theory that reflects the empirical world. This Article models the interaction of settlement dynamics and the economic theory of negligence. It shows that tort claims are systematically devalued during settlement relative to the legal standard. Central to this thesis is a proper conception and accounting of cost. Cost is typically viewed as the transaction cost of litigation processing. Cost, however, encompasses more than this. Each dispute has a cost of resolution, defined as the discounting effect of risk on legal valuation. A spread between the parties’ respective costs of resolution creates an arbitrage opportunity in which the bargaining process presents superior pricing to that of the public forum. In the typical tort context, this cost advantage belongs to the defendant. As long as settlement is the primary method of dispute resolution, tort law is structurally incapable of maintaining the efficient standard of care to which courts aspire. Under this analysis, the fault standard is both an instrument of valuation and a cost- shifting mechanism. The theory of negligence, then, devalues the litigation asset, thus reducing the defendant’s liability, and settlement is the result. The effect is to promote a system of self-regulation of accidents in the shadow of uncertain government pricing. These functionalities connect the historical origins of negligence to its “unexpected persistence” today. Negligence maintains the essentially private nature of tort law even as it touches social policy and public conscience.
November 2014, Vol. 66, No. 6
Lily Kahng, The Taxation of Intellectual Capital