Dispersed Losses in Tort Law – An Economic Analysis

From an economic perspective tort law is to serve two important functions: deterrence of wrongdoers and victim compensation. We can easily construct examples of torts leading to small and widespread harm for which it is questionable whether a rational victim will initiate an individual lawsuit. This is mainly true because of rational apathy, free-riding problems and information asymmetries. In this paper we assess various funding and insurance options that are available with a view to improving the individual's risk ratio and the potential of out-of-court dispute resolution mechanisms to capture small claims. Next, we consider the attribute “widespread” and, therefore, look at any solution that would involve grouping claims, thereby leading to cost-reductions for the individual. Public law enforcement functions in a way similar to grouping claims because a collective matter is dealt with in one proceeding and individuals are relieved of (most of) the litigation costs. Combinations of public and private means are likewise possible. Throughout the analysis we will differentiate cases of small and widespread and very small and widespread harm. For the latter the threat of collective compensation claims is neither credible nor economically feasible. This calls for an investigation of alternative remedies to compensation, such as skimming off procedures, fines or punitive damages that uphold the deterrent effect. In addition to the theoretical analysis, we will refer to current EU policy where applicable