Sergio Mittlaender

Traditional tort models analyze the role of liability rules to induce socially optimal levels of activity and of care, focusing on the law’s ability to deter accidents by imposing a cost on tortfeasors. Legal liability, however, further provides compensation for victims, and is apt to reduce victims’ levels of aggrievement and thereby crowd out socially costly forms of private redress. This article presents a model of accidents and liability that endogeneizes aggrievement experienced by victims and its behavioral consequence in form of retaliation. It reveals how liability rules crowd-out retaliation and how strict liability performs better than negligence both to minimize retaliation and to avoid overinvestment in care that is predicted to arise under negligence. The predictions are tested in a laboratory experiment that provides evidence for these effects and for the underlying assumption of the model that experienced losses lead victims to retaliate. Compensation is justified not only because of its effects on potential tortfeasors, but also because of its effects on victims’ behavior, and thereby on social welfare.

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