Incentives, Compensation, and Irreparable Harm
Files
Description
Many individual, organisational, and corporate activities impose a risk of harm on individuals, their property, or the environment generally. Society regulates these risks in a variety of ways. This chapter focuses on the use of ex post liability rules that impose liability on one or more actors deemed ‘responsible’ for the harm. In domestic legal systems, ex post liability rules typically regulate the basic relations between private individuals; intentional torts, accidents between strangers, and most contractual relations are governed by ex post liability rules. Ex post regulation of harm might play an equally significant role in international legal contexts as, in many international law contexts, institutions for the creation and implementation of ex ante regulatory instruments are scarce and underdeveloped. I shall distinguish three aspects of the assignment of responsibility. First, the law determines what I shall call causal responsibility; it identifies which actor or actors created the risk. Second, the law assigns what I shall call legal responsibility for the harm; it identifies those actors who must ‘remedy’ the harm. Finally, the law determines financial responsibility for whatever remedy the law provides. These three forms of responsibility are related in complex ways. First, the complexity arises in part from the tension between two distinct motivations for a liability regime. On the one hand, the law, through the liability regime, may seek to mitigate the risks that led to the harm. This aim is forward looking; society wants agents to take actions that reduce the risks and hence, on average, the realised harms from these risks. I shall sometimes call this aim, deterrence and sometimes the incentive aim. On the other hand, a liability regime seeks to compensate the ‘victim’ of the harm. This aim is backward looking. A liability regime accomplishes this compensation by ‘shifting’ the realised harm from the ‘victim’ to one or more legally responsible agents. I shall call this aim compensation. Society has other means, both legal and non-legal, for achieving the twin aims of compensation and deterrence. Ex ante regulation through licensing, taxing of inputs, command and control regulations, product standards, and markets in tradable permits, to name a few, are ex ante tools that regulate or deter actions that impose risks. In most instances, these regulatory techniques complement rather than replace regulation through ex post liability rules, though, as noted, they typically require a strong institutional basis for their successful creation and implementation. The law also may shift the burdens created by the realised harm. More precisely, society may spread the risk through insurance or other mechanisms. Insurance requires the bearer of financial responsibility to have made a prior premium payment in exchange for the right to indemnifi- cation from the insurer for the loss. Other mechanisms typically spread losses among taxpayers by providing ‘social insurance’ to the individual financially responsible. A second source of complexity in the relation among the three types of responsibility arises from the nature of the harms that risky activities cause. Much of the legal literature treats harms in an undifferentiated way and understands the aim of compensation as one of ‘making the victim whole’. This approach only makes sense for certain types of harms, specifically monetary losses (or losses of property) and certain types of what I shall call ‘transient personal injury’. In these instances, the victim can in fact be made whole, at least in the economist’s sense of delivering a bundle of goods that makes the victim, from her own perspective, as well off after suffering the harm as she would have been had the harm not occurred. Harms for which an agent can be made whole I shall call ‘monetary harms’ or ‘financial harms’. Not all harms however are financial harms. Some harm is irreparable. Irreparable harms cannot be shifted or spread. The victim alone bears them; as a consequence, I shall argue, deterrence should play the dominant role in the assignment of legal responsibility and the determination of the extent of financial responsibility.
Source Publication
Distribution of Responsibilities in International Law
Source Editors/Authors
André Nollkaemper, Dov Jacobs
Publication Date
2015
Recommended Citation
Kornhauser, Lewis A., "Incentives, Compensation, and Irreparable Harm" (2015). Faculty Chapters. 1019.
https://gretchen.law.nyu.edu/fac-chapt/1019
