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Damage Multipliers in Market Relationships

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  • Craswell, Richard

Abstract

It is sometimes said that the optimal sanction is the external harm caused by the offense multiplied by one over the probability of punishment. Prior analyses have identified several factors that could raise or lower this optimal multiplier. This article identifies an additional adjustment when victims are customers of the offender and the sanction is paid to victims in the form of damages. In these market relationships, higher sanctions translate into higher prices for customers. If customers are risk-neutral, this will not matter; but if customers are risk-averse, higher sanctions increase the variance of their returns (even if third-party insurance is available). If customers are risk-averse, the optimal number of violations and the optimal quantity of purchases could also change. The net effect could either raise or lower the optimal multiplier, but simulations suggest reductions on the order of 4-40 percent. Copyright 1996 by the University of Chicago.

Suggested Citation

  • Craswell, Richard, 1996. "Damage Multipliers in Market Relationships," The Journal of Legal Studies, University of Chicago Press, vol. 25(2), pages 463-492, June.
    • Handle: RePEc:ucp:jlstud:v:25:y:1996:i:2:p:463-92
    DOI: 10.1086/467985
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    Cited by:

    1. Marta Cenini & Barbara Luppi & Francesco Parisi, 2011. "Incentive effects of class actions and punitive damages under alternative procedural regimes," European Journal of Law and Economics, Springer, vol. 32(2), pages 229-240, October.
    2. Karpoff, Jonathan M & Lott, John R, Jr, 1999. "On the Determinants and Importance of Punitive Damage Awards," Journal of Law and Economics, University of Chicago Press, vol. 42(1), pages 527-573, April.
    3. Bhole, Bharat, 2007. "Due-care standards in a market setting with legal error," International Review of Law and Economics, Elsevier, vol. 27(2), pages 154-169.
    4. Yun, John M., 2004. "Publicity and the optimal punitive damage multiplier," International Review of Law and Economics, Elsevier, vol. 24(1), pages 15-27, March.

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