Welfare Implications of Costly Litigation under Strict Liability

This article examines a model of strict liability with costlylitigation and presents conditions under which (1) potentialinjurers take optimal precautions, (2) increasing the cost oflitigation enhances precaution and social welfare, (3) the optimallevel of liability exceeds the compensatory level, and (4) increasingthe rate of settlement enhances social welfare. The resultshave implications for controversies surrounding fee shifting,optimal damage awards (e.g., punitive damages), and the socialdesirability of settlement. The most striking implication isthat fee shifting in favor of prevailing plaintiffs is sociallydesirable in low-transaction-cost settings.