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40 Ala. L. Rev. 1143 (1988-1989)
Punitive Damages for Deterence: When and How Much

handle is hein.journals/bamalr40 and id is 1151 raw text is: PUNITIVE DAMAGES FOR DETERRENCE: WHEN AND How MUCH? Robert D. Cooter* Abstract: An economic model of deterrence is used to derive two prescriptions for punitive damages that apply to economi- cally motivated defendants, including businesses. To recover punitive damages, a plaintiff should have to prove a gross shortfall from the legal standard by the defendant that would be profitable if liability were limited to compensatory damages. In a word, incentive inadequacy should be proven. A key element in the proof is establishing the existence and extent of enforcement error. If the court finds that punitive damages are to be awarded, the punitive multiple should be set equal to the reciprocal of the enforcement error. These rules, if adopted, would provide incen- tives for efficient deterrence and would have significant consequences for current legal practice, including making the ra- tio rule more definite, lowering the ratios actually allowed, and largely eliminating a defendant's net worth as a consideration for setting punitive damages. TABLE OF CONTENTS INTRODUCTION ............................................. 1144 I. ECONOMiC MODEL OF PUNITIVE DAMAGES FOR DETERRENCE .......................................... 1149 A. Simple Model of Binary Choice ................. 1149 B. Simple Model of Continuous Choice ............. 1153 C. Uncertain Legal Standards ..................... 1159 D. Graphical Exposition of the Model .............. 1162 E. Costly Dispute Resolution ...................... 1166 F. Limitations of the Model ...................... 1169 1. Large or Biased Error in Standards ......... 1169 * Professor of Law. University of California at Berkeley, Olin Visiting Professor of Law, University of Virginia. 1143

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