I bet you cannot find any insurance company that will insure you against willful damage that you caused with your vehicle.
Based on a quick google search, sounds like this is true, though the relevant case law is surprisingly recent.
On reflection, I think the thing I’d ideally like here would be:
Product manufacturer/seller is still liable for all damages including from intentional acts, BUT
In case of intentional acts, the manufacturer/seller can sue whoever intentionally caused the damage to cover the cost to the manufacturer/seller.
Why this level of indirection, rather than just making the person who intentionally caused damage liable directly? Well, for small damages, the person intentionally causing harm ends up liable. And the person intentionally causing harm always ends up liable for damage to themselves. But the important difference is the case where someone can use a product to cause damage to others far in excess of the damager’s own net worth.
A central case here would be guns. If someone goes on a shooting spree, they’re quickly going to rack up liability far in excess of their own net worth. And then, under the sort of framework I’m advocating here, the gun manufacturer/seller would be responsible for the bulk of the damages. That sounds to me like a remarkably sensible policy in general: if someone is selling a product with such high potential for harmful misuse, then it’s on the seller to know their customer, insure the rest of the world against damage by that customer far in excess of what the customer themselves can cover, etc. Otherwise, this product is too dangerous to sell.
Who should be second in line for liability (when the actual culprit isn’t caught or can’t pay) is a more debatable question, I think, but I still do not see any clear reason for a default of assigning it to the product manufacturer.
Your principle 3 says we should assign liability to whoever can most cheaply prevent the problem. My model says that will sometimes be the manufacturer, but will more often be the victim, because they’re much closer to the actual harm. For instance, it’s cheaper to put your valuable heirloom into a vault than it is to manufacture a backpack that is incapable of transporting stolen heirlooms. Also consider what happens if more than one product was involved; perhaps the thief also wore shoes!
My model also predicts that in many cases both the manufacturer and the victim will have economically-worthwhile mitigations that we’d ideally like them to perform. I think the standard accepted way of handling situations like that is to attempt to create a list of mitigations that we believe are reasonable for the manufacturer to perform, then presume the manufacturer is blameless if they did those, but give them liability if they failed to do one that appears relevant. Yes, this is pretty much what you complained about in your malpractice example. Our “list of reasonable mitigations” will probably not actually be economically optimal, which adds inefficiency, but plausibly less inefficiency than if we applied strict liability to any single party (and thereby removed all incentive for the other parties to perform mitigations).
Seems false? The net worth of Boeing is about $150B, 9/11 killed 3,000 people, and a typical life insurance payout is like $150,000, so Boeing would be liable for about $504M. Maybe they’re leveraged such that they can’t eat that cost, but seems unlikely?
I am not sure how $150k is a remotely relevant number. I tried Googling a couple vaguely-similar things:
Googling ‘asbestos liability’ turned up this page claiming
The average asbestos settlement amount is typically between $1 million and $2 million, as Mealey’s latest findings show. The average mesothelioma verdict amounts are between $5 million and $11.4 million.
and asbestos exposure is to my understanding usually not immediately lethal.
Googling ‘J&J talcum powder’ turns up a lot of results like this one:
After 8 hours of deliberations Thursday, a St. Louis jury awarded $4.69 billion to 22 women who sued pharmaceutical giant Johnson & Johnson alleging their ovarian cancer was caused by using its powder as a part of their daily feminine hygiene routine.
The jury award includes $550 million in compensatory damages and $4.14 billion in punitive damages.
which works out to $25M/death even if we entirely ignore the punitive damages portion, and even if we assume that all 22 victims immediately died.
It doesn’t seem at all uncommon for liabilities to work out to well upwards of $10M/victim, even in cases with much less collateral damage, much less certain chains of causation, much less press coverage, and victims not actually immediately dying.
$12.5M/victim would be $37.5B, which is still less than Boeing’s market cap today (though comparable to what Boeing’s market cap was in 2001). This also ignores all other costs of 9/11: Googling shows 6,000 injuries, plus I think a fairly large amount of property damage (edited to add: quick Googling turns up a claim of $16 billion in property damage to businesses).
You can argue the exact numbers, I guess, but I nevertheless think that, as a matter of legal realism if nothing else, imposing liability for 9/11 on Boeing would have ended up bankrupting it.
I just chose a number that seems plausibly related, and determined by market pricing rather than public choice. If we do want to put our faith in the public choice process, looking more closely at wrongful death lawsuits tables from Lawlinq (a lawyer referral website), and various accident attorney websites rather than abnormally large suits seen in the news, they say on average wrongful death suits can range from $250k to $3M+, so about within an order of magnitude of what I said. We can talk about whether that’s too high/low, but it is a lot lower than $25M/death.
It also seems likely a lot of the cost seen in the stock market was from peoples’ reactions to the event, not the event itself. Seems strange to hold Boeing responsible for those reactions.
The $35B number seems reasonable, given the article Ryan Greenblatt linked below. In such a case, hopefully Boeing would have prepared well for such a disaster.
You can argue the exact numbers, I guess, but I nevertheless think that, as a matter of legal realism if nothing else, imposing liability for 9/11 on Boeing would have ended up bankrupting it.
It does seem reasonable to me to argue the numbers, because the post is saying “if you get the numbers right, then good things will happen, so we should implement this policy”. The claim that we will predictably get the numbers wrong, and so if we try to implement the policy bad things will happen seems very different from giving examples of where the economics described in the post seems to break down. In the former scenario we may want to advocate for a modified version of the policy, which consistently gets the numbers right (like Hanson’s foom insurance scheme). In the latter, we want to figure out why the economics don’t work as advertised, and modify our policy to deal with a more complex world than the standard economic model.
Seems like a cool paper, you’re probably right about the $35B number. I do think its strange to hold Boeing responsible for the actions of the US government after the event though. Seems to violate principle 3.
+1. My biggest complaint about the various comment threads on this post is that people keep being like “but if companies are liable for X, then the entire industry will go out of business!” and ~every time someone has said that I’ve thought “Umm, have you actually done a Fermi estimate? That shouldn’t be anywhere near enough to shut down the business, especially if they raise prices in response to the liability.”.
I have almost the exact inverse frustration, where it seems to me that people are extraordinarily willing to assume ‘companies all have gigantic Scrooge McDuck-style vaults that can pay any amount with no effect’ to the point where they will accept unexamined a claim that one corporation could easily accept full liability for 9/11.
I mean, I am often frustrated with that sort of reasoning too, but that’s not the thing driving my intuitions here. The thing driving my intuitions here is basically “look, if <product> is very obviously generating vastly more value than all the liability we’re talking about, then how on earth are all of it’s producers going to go out of business?”. Applied to the 9/11 example, that logic says something like “look, airplanes obviously generate vastly more value than all the liability of 9/11, so how on earth would that level of liability (and even an order of magnitude or more on top of it) drive airplane manufacturers out of business?”.
(Bear in mind here that we need to solve for the equilibrium, not just consider what would happen if that level of liability were suddenly slapped on companies in our current world without warning. The equilibrium world involves higher prices to account for the implicit insurance in nearly all goods and services, and it involves basically every business having liability insurance, and on the other side of the equation it involves the vast majority of regulatory agencies ceasing to exist.)
A potential answer, if you want to consider things through a pure econ lens, of why I would be skeptical of this policy even in a perfect-spherical-cow world without worries about implementation difficulties:
I commented this below, but reiterating here: in almost all products, the manufacturer generally does not capture anything remotely close to all of the value of a product they produce. The value of me having air travel available mostly accrues to, well, me. Boeing captures only a small portion of it. It is entirely possible for something to be a large net benefit to the world, and also for the harm it causes to drastically exceed the manufacturer’s portion of the benefits.
In theory, this can change by having Boeing raise their prices to capture more of the value they create, in order to pay this liability. (I wish to note in passing that I believe this would have to be quite a large price increase, but I do not consider that central to the argument. So long as the liability regime is applied evenly, and is impossible to evade by not having deep pockets—perhaps by requiring liability insurance? - all Boeing’s competitors will also have to implement the same price rises).
At that point, consumers will consume less (I believe often much less) of the product. Is that efficient? Sometimes yes, sometimes no. One central question to consider is whether reducing the amount of a product supplied would linearly reduce the amount of harm done:
Say a car sells for $20k, each car has a 1/10k chance of killing someone, you charge the manufacturer $10M if it does, the manufacturer adds $1k to the price of cars to pay this, and people respond by buying fewer cars. This is a fairly strong case for your liability theory! The small chance of people being killed by cars was an unpriced externality, which is being correctly internalized and hence reduced.
However, suppose that the supply of terrorism is determined by how many religious extremists have gotten mad at the US lately. In this case, your increase to air prices reduces the amount of air travel but does not reduce the amount of terrorism! Here, you’ve simply created a large deadweight loss by reducing the amount of air travel done, with no offsetting benefit.
In our real world, my objections are driven primarily by the ways in which our legal system is not in fact perfectly implemented. A list that I do not consider complete:
I don’t think it’s uncommon for judgments against deep-pocketed defendants to be imposed vastly in excess of harm done, to be driven primarily by public opinion rather than justice, or to cause huge indirect damages for no real benefit.
I believe that any company that found itself being legally liable for 9/11 would as a factual matter have been utterly destroyed by that liability, even if a perfectly even-handed justice system might have charged it only $100B, and that ‘that company having more insurance/higher prices to let it cover those costs’ would as a factual matter simply have resulted in it being charged more until it no longer existed, however much that required.
I am concerned that this policy would make many large industries be dominated by legal-skills over efficiency to a much greater extent than is already the case (and I kinda think that is already too much the case). If GM has 1% better lawyers than Toyota, but Toyota has 1% better cars than GM, the more that ‘legal liability costs’ are a major impact on a company’s bottom line the more GM ends up advantaged.
You suggest:
Product manufacturer/seller is still liable for all damages including from intentional acts, BUT
In case of intentional acts, the manufacturer/seller can sue whoever intentionally caused the damage to cover the cost to the manufacturer/seller.
I worry that this policy would lead to some interesting incentives around who to sell to. If Bill Gates goes crazy and uses a chainsaw to murder a bunch of teenagers, the manufacturer can recover from him. If I do, they cannot. This means...that...they should charge Bill Gates a lower price than me? We already have a lot of obnoxious politics around similar issues in car insurance, I’m not enthusiastic about extending that to every other industry.
It sounds like your most central concerns would mostly be addressed by a system similar to worker’s comp. The key piece of workers comp is that there’s a fixed payment for each type of injury. IIUC, There’s typically no opportunity to sue for additional damages, no opportunity to “charge more until the company no longer exists”, and minimal opportunity for legal skills to make the payments higher/lower.
Would that in fact address your most central concerns?
Based on a quick google search, sounds like this is true, though the relevant case law is surprisingly recent.
On reflection, I think the thing I’d ideally like here would be:
Product manufacturer/seller is still liable for all damages including from intentional acts, BUT
In case of intentional acts, the manufacturer/seller can sue whoever intentionally caused the damage to cover the cost to the manufacturer/seller.
Why this level of indirection, rather than just making the person who intentionally caused damage liable directly? Well, for small damages, the person intentionally causing harm ends up liable. And the person intentionally causing harm always ends up liable for damage to themselves. But the important difference is the case where someone can use a product to cause damage to others far in excess of the damager’s own net worth.
A central case here would be guns. If someone goes on a shooting spree, they’re quickly going to rack up liability far in excess of their own net worth. And then, under the sort of framework I’m advocating here, the gun manufacturer/seller would be responsible for the bulk of the damages. That sounds to me like a remarkably sensible policy in general: if someone is selling a product with such high potential for harmful misuse, then it’s on the seller to know their customer, insure the rest of the world against damage by that customer far in excess of what the customer themselves can cover, etc. Otherwise, this product is too dangerous to sell.
Who should be second in line for liability (when the actual culprit isn’t caught or can’t pay) is a more debatable question, I think, but I still do not see any clear reason for a default of assigning it to the product manufacturer.
Your principle 3 says we should assign liability to whoever can most cheaply prevent the problem. My model says that will sometimes be the manufacturer, but will more often be the victim, because they’re much closer to the actual harm. For instance, it’s cheaper to put your valuable heirloom into a vault than it is to manufacture a backpack that is incapable of transporting stolen heirlooms. Also consider what happens if more than one product was involved; perhaps the thief also wore shoes!
My model also predicts that in many cases both the manufacturer and the victim will have economically-worthwhile mitigations that we’d ideally like them to perform. I think the standard accepted way of handling situations like that is to attempt to create a list of mitigations that we believe are reasonable for the manufacturer to perform, then presume the manufacturer is blameless if they did those, but give them liability if they failed to do one that appears relevant. Yes, this is pretty much what you complained about in your malpractice example. Our “list of reasonable mitigations” will probably not actually be economically optimal, which adds inefficiency, but plausibly less inefficiency than if we applied strict liability to any single party (and thereby removed all incentive for the other parties to perform mitigations).
Can you lay out step by step, and argument by argument, why that should be the case in a real world legal system like the US?
It seems very far from currently accepted jurisprudence and legal philosophy.
It sounds like this policy straightforwardly implies that 9/11 should have bankrupted Boeing. Do you endorse that view?
Seems false? The net worth of Boeing is about $150B, 9/11 killed 3,000 people, and a typical life insurance payout is like $150,000, so Boeing would be liable for about $504M. Maybe they’re leveraged such that they can’t eat that cost, but seems unlikely?
I am not sure how $150k is a remotely relevant number. I tried Googling a couple vaguely-similar things:
Googling ‘asbestos liability’ turned up this page claiming
and asbestos exposure is to my understanding usually not immediately lethal.
Googling ‘J&J talcum powder’ turns up a lot of results like this one:
which works out to $25M/death even if we entirely ignore the punitive damages portion, and even if we assume that all 22 victims immediately died.
faul_sname, below, links:
It doesn’t seem at all uncommon for liabilities to work out to well upwards of $10M/victim, even in cases with much less collateral damage, much less certain chains of causation, much less press coverage, and victims not actually immediately dying.
$12.5M/victim would be $37.5B, which is still less than Boeing’s market cap today (though comparable to what Boeing’s market cap was in 2001). This also ignores all other costs of 9/11: Googling shows 6,000 injuries, plus I think a fairly large amount of property damage (edited to add: quick Googling turns up a claim of $16 billion in property damage to businesses).
And our legal system is not always shy about adding new types of liability—pain and suffering of victims’ families? Disruption of work? Securities fraud (apparently the stock market dropped $1.4 trillion of value off 9/11)?
You can argue the exact numbers, I guess, but I nevertheless think that, as a matter of legal realism if nothing else, imposing liability for 9/11 on Boeing would have ended up bankrupting it.
I just chose a number that seems plausibly related, and determined by market pricing rather than public choice. If we do want to put our faith in the public choice process, looking more closely at wrongful death lawsuits tables from Lawlinq (a lawyer referral website), and various accident attorney websites rather than abnormally large suits seen in the news, they say on average wrongful death suits can range from $250k to $3M+, so about within an order of magnitude of what I said. We can talk about whether that’s too high/low, but it is a lot lower than $25M/death.
It also seems likely a lot of the cost seen in the stock market was from peoples’ reactions to the event, not the event itself. Seems strange to hold Boeing responsible for those reactions.
The $35B number seems reasonable, given the article Ryan Greenblatt linked below. In such a case, hopefully Boeing would have prepared well for such a disaster.
It does seem reasonable to me to argue the numbers, because the post is saying “if you get the numbers right, then good things will happen, so we should implement this policy”. The claim that we will predictably get the numbers wrong, and so if we try to implement the policy bad things will happen seems very different from giving examples of where the economics described in the post seems to break down. In the former scenario we may want to advocate for a modified version of the policy, which consistently gets the numbers right (like Hanson’s foom insurance scheme). In the latter, we want to figure out why the economics don’t work as advertised, and modify our policy to deal with a more complex world than the standard economic model.
I think this dramatically understates the total damages of 9/11. This source claims around $35 billion for New York City alone. I think the damages are higher if you include (e.g.) the longer term effects on air travel including the TSA.
Seems like a cool paper, you’re probably right about the $35B number. I do think its strange to hold Boeing responsible for the actions of the US government after the event though. Seems to violate principle 3.
+1. My biggest complaint about the various comment threads on this post is that people keep being like “but if companies are liable for X, then the entire industry will go out of business!” and ~every time someone has said that I’ve thought “Umm, have you actually done a Fermi estimate? That shouldn’t be anywhere near enough to shut down the business, especially if they raise prices in response to the liability.”.
I have almost the exact inverse frustration, where it seems to me that people are extraordinarily willing to assume ‘companies all have gigantic Scrooge McDuck-style vaults that can pay any amount with no effect’ to the point where they will accept unexamined a claim that one corporation could easily accept full liability for 9/11.
I mean, I am often frustrated with that sort of reasoning too, but that’s not the thing driving my intuitions here. The thing driving my intuitions here is basically “look, if <product> is very obviously generating vastly more value than all the liability we’re talking about, then how on earth are all of it’s producers going to go out of business?”. Applied to the 9/11 example, that logic says something like “look, airplanes obviously generate vastly more value than all the liability of 9/11, so how on earth would that level of liability (and even an order of magnitude or more on top of it) drive airplane manufacturers out of business?”.
(Bear in mind here that we need to solve for the equilibrium, not just consider what would happen if that level of liability were suddenly slapped on companies in our current world without warning. The equilibrium world involves higher prices to account for the implicit insurance in nearly all goods and services, and it involves basically every business having liability insurance, and on the other side of the equation it involves the vast majority of regulatory agencies ceasing to exist.)
A potential answer, if you want to consider things through a pure econ lens, of why I would be skeptical of this policy even in a perfect-spherical-cow world without worries about implementation difficulties:
I commented this below, but reiterating here: in almost all products, the manufacturer generally does not capture anything remotely close to all of the value of a product they produce. The value of me having air travel available mostly accrues to, well, me. Boeing captures only a small portion of it. It is entirely possible for something to be a large net benefit to the world, and also for the harm it causes to drastically exceed the manufacturer’s portion of the benefits.
In theory, this can change by having Boeing raise their prices to capture more of the value they create, in order to pay this liability. (I wish to note in passing that I believe this would have to be quite a large price increase, but I do not consider that central to the argument. So long as the liability regime is applied evenly, and is impossible to evade by not having deep pockets—perhaps by requiring liability insurance? - all Boeing’s competitors will also have to implement the same price rises).
At that point, consumers will consume less (I believe often much less) of the product. Is that efficient? Sometimes yes, sometimes no. One central question to consider is whether reducing the amount of a product supplied would linearly reduce the amount of harm done:
Say a car sells for $20k, each car has a 1/10k chance of killing someone, you charge the manufacturer $10M if it does, the manufacturer adds $1k to the price of cars to pay this, and people respond by buying fewer cars. This is a fairly strong case for your liability theory! The small chance of people being killed by cars was an unpriced externality, which is being correctly internalized and hence reduced.
However, suppose that the supply of terrorism is determined by how many religious extremists have gotten mad at the US lately. In this case, your increase to air prices reduces the amount of air travel but does not reduce the amount of terrorism! Here, you’ve simply created a large deadweight loss by reducing the amount of air travel done, with no offsetting benefit.
In our real world, my objections are driven primarily by the ways in which our legal system is not in fact perfectly implemented. A list that I do not consider complete:
I don’t think it’s uncommon for judgments against deep-pocketed defendants to be imposed vastly in excess of harm done, to be driven primarily by public opinion rather than justice, or to cause huge indirect damages for no real benefit.
I believe that any company that found itself being legally liable for 9/11 would as a factual matter have been utterly destroyed by that liability, even if a perfectly even-handed justice system might have charged it only $100B, and that ‘that company having more insurance/higher prices to let it cover those costs’ would as a factual matter simply have resulted in it being charged more until it no longer existed, however much that required.
I am concerned that this policy would make many large industries be dominated by legal-skills over efficiency to a much greater extent than is already the case (and I kinda think that is already too much the case). If GM has 1% better lawyers than Toyota, but Toyota has 1% better cars than GM, the more that ‘legal liability costs’ are a major impact on a company’s bottom line the more GM ends up advantaged.
You suggest:
I worry that this policy would lead to some interesting incentives around who to sell to. If Bill Gates goes crazy and uses a chainsaw to murder a bunch of teenagers, the manufacturer can recover from him. If I do, they cannot. This means...that...they should charge Bill Gates a lower price than me? We already have a lot of obnoxious politics around similar issues in car insurance, I’m not enthusiastic about extending that to every other industry.
It sounds like your most central concerns would mostly be addressed by a system similar to worker’s comp. The key piece of workers comp is that there’s a fixed payment for each type of injury. IIUC, There’s typically no opportunity to sue for additional damages, no opportunity to “charge more until the company no longer exists”, and minimal opportunity for legal skills to make the payments higher/lower.
Would that in fact address your most central concerns?