October 2005
Can Tort Reform Save Lives?

A recent paper by professors Paul H. Rubin and Joanna M. Shepherd of Emory University School of Law provides striking and counterintuitive evidence that tort reforms at the state level contribute to a decrease in accidental deaths. Rubin and Shepherd found that reforms such as capping non-economic damages, requiring a higher standard of evidence for punitive damages, and reforming product liability law have resulted in a decrease in the prices of safety-improving goods and services, which in turn has led to greater safety. These findings have profound implications for our tort system: the primary argument for the status quo is the promise of greater safety, but if the current system does not even provide that, its costs must be seriously reassessed. The authors discussed their findings with other experts in tort reform at an October 12 AEI conference.

Paul H. Rubin
Emory University School of Law and Department of Economics

There are two major theories of torts. In the classic theory, the parties are strangers, the activity in question increases risk, damages are pecuniary (making insurance economically practical), and transaction costs are low. In the modern theory, however, the parties have a preexisting relationship, the activities in question are risk-reducing, the damages are non-pecuniary (making insurance impractical), and transaction costs are often as large as the damages themselves. These two theories suggest opposite consequences for tort reform. In the classic theory, tort reforms will increase the risk of accidents by decreasing potential tort-feasors’ incentives to internalize the costs of accidents. In other words, with less liability, people will behave more carelessly. In the modern theory, however, tort reforms may decrease the risks of accidents by lowering prices of risk-reducing goods and services, which more people will then be able to purchase. The theoretical evidence for the modern theory is especially robust in the context of medicine, where Harvard Law Professor W. Kip Viscusi and others have shown that the high costs of liability insurance have decreased supply. Our study, by examining the rates of accidental death in states before and after tort reforms, sought to discover which of the two effects prevailed.

Joanna M. Shepherd
Emory University School of Law

We found that for nearly all types of tort reform, accidental death rates decreased, suggesting that the price effect predicted by the modern theory outweighed the decreased internalization effect predicted by the traditional theory. Reforms affecting the collateral source rule (allowing juries to hear about tort victims’ insurance recoveries) were a major exception, causing marked increases in accidental death rates. This may have been a case of the classic theory’s effect prevailing, as the incentives for potential tort-feasors to internalize the costs of their actions may have been effectively eliminated whenever they could expect insurance among those at risk. Alternatively, though, by encouraging insurers (who, as repeat players would be more successful) to litigate more aggressively, the modern price effect may have once again predominated, albeit in a roundabout way. Overall, the policy implications of the study are that the subrogation process (and past reforms to it) must be improved in order to address the collateral source problems, but that on the whole tort reform will lead to greater safety, therefore undermining the major complaint against it.

Ted Frank
AEI

This study is important in highlighting the price effect, which is too often neglected in law school pedagogy. Considering the negative effects on safety is essential, since the current environment has a perverse effect on safety innovations by making those who adopt them more likely to be found liable than if they had not attempted to improve safety. Innovations today happen in spite of our country’s tort system, not because of it, and this has allowed Europe and Japan to take the lead in, for example, the auto industry.

Because the conclusions of this paper challenge so many vested interests, it will be important to test its robustness against potential attacks: the effect of workers compensation systems in state accidental death rates, measuring the time at which tort reforms become safe from judicial nullification rather than solely relying on the year of passage by a legislature, the paper’s standards for definitions of independent variables when testing for the marginal effect of different levels of caps, and a further explanation of why endogenous variables such as judicial elections and gun laws do not change the results. The paper needs a story that explains why the dependent variable of deaths from accidental poisoning and falls are influenced by changes in tort law: perhaps it is really a question of medical malpractice law and availability of emergency medicine, and then that can be tested far more finely than this model does.

Alex Tabarrok
George Mason University Department of Economics

Although this is an excellent paper, I am not yet convinced of its conclusions, which are difficult to reconcile with several other studies. The international picture shows a flat relationship between safety and the size of the tort system, which suggests that the tort system should be neither a negative nor a positive. It also seems that many of their causes of accidental deaths (e.g. falls, drownings) have nothing at all to do with the tort system. The effect also seems inordinately large, especially in relation to such reforms as punitive damages, which affect a tiny sliver of cases. Another problem is that they have excluded one of the most prevalent tort reforms, no-fault auto accidents, where the evidence has clearly shown a decrease in safety. Other studies that show the tort system decreasing safety, such as Manning’s study regarding vaccines, are much clearer in terms of causation. Professors Rubin and Shepherd lack such a plausible mechanism for tort reforms causing such significant changes.

Jonathan Klick
AEI and Florida State University

My own research makes me believe that the medical malpractice side of this paper’s data is driving the results, as doctors are forced out of business by the price effect of the tort system in the absence of reforms. What is needed to make these results clearer is an effective in-state control group, which could be one of the variables that would not be plausibly affected by tort reform. In this way, we might be able to more effectively isolate which reforms were most effective.

AEI research assistant Philip Wallach prepared this summary.