Parisi, Francesco; Cenini, Marta Silvia --- "Punitive Damages and Class Actions" [2012] ELECD 308; in Backhaus, G. Jürgen; Cassone, Alberto; Ramello, B. Giovanni (eds), "The Law and Economics of Class Actions in Europe" (Edward Elgar Publishing, 2012)

Book Title: The Law and Economics of Class Actions in Europe

Editor(s): Backhaus, G. Jürgen; Cassone, Alberto; Ramello, B. Giovanni

Publisher: Edward Elgar Publishing

ISBN (hard cover): 9781847208033

Section: Chapter 9

Section Title: Punitive Damages and Class Actions

Author(s): Parisi, Francesco; Cenini, Marta Silvia

Number of pages: 16

Extract:

9. Punitive damages and class actions
Francesco Parisi and Marta Silvia Cenini


1. INTRODUCTION

Punitive damages (or exemplary damages, as they are called in the United
Kingdom) are damages that are awarded in excess of the plaintiff's actual
harm when compensatory damages are insufficient to deter and redress
wrongdoing. The law and economics literature (Polinsky and Shavell 1998;
Shavell 2004) usually suggests that punitive damages1 should be awarded
when a tortfeasor has a significant chance of escaping liability for the harm
caused. The economic function of punitive damages is that of deterring
undetectable torts and tortfeasors that strategically rely on imperfect
enforcement. These conditions are often found when litigation costs are
very high or when it is difficult for victims to identify who injured them.
Punitive damages should offset the deterrence-diluting effect of the chance
of escape from liability. Given this function, punitive damages should be
determined by multiplying the harm caused by the reciprocal of the
probability of being found liable. Mathematically, let's consider the case of
a unilateral accident and define the level of precaution undertaken by the
prospective tortfeasor as x, which imposes a linear unitary cost w. As usual,
p is the probability of creating an accident of gravity A. The probability of
an accident is a function of x, with p' <0 and p'> 0. The tortfeasor's
liability when the accident actually occurs is L. Given any potential acci-
dent situation i, the social objective is to minimize the social cost ...