In recent years there has been a renewed effort to ground conventional law and economics methodology, with its exclusive focus on efficiency and income redistribution through the tax system, in modern welfare economics ( Kaplow & Shavell 1994, 2001 ). This effort raises a challenge to the...

This article examines a model of strict liability with costly litigation and presents conditions under which (1) potential injurers take optimal precautions, (2) increasing the cost of litigation enhances precaution and social welfare, (3) the optimal level of liability exceeds the compensatory...