Optimal Pooling in Claims Resolution Facilities, 53 Law and Contemporary Problems 159
(1990).
Return to Professor Ayres' Homepage
Return to Professor Ayres' Resume
The various claims resolution facilities discussed in this symposium exhibit a
number of distinctive qualities and governing principles. A common characteristic of
many of these facilities, however, is an attempt to avoid the litigation costs of
individualized proof of damages by channeling mass tort claims into rough categories
for compensation. All claimants within a particular category receive similar
compensation, even though they might be able to prove disparate damages through
litigation. This article seeks to analyze the efficiency of pooling disparate claims
through the categorical compensation of claims facilities.
An efficiency standard for evaluating tort law usually focuses on the ability of the
legal rules to induce efficient levels of precaution; the costs of implementing the rules
are relegated to a second order of importance. But this standard often is inapplicable to
claims resolution facilities because many of the settlements that establish the facilities
place an absolute cap on the defendant's liability. Ken Feinberg, trustee of the Dalkon
Shield Claimants Trust, stressed the importance of such caps to the feasibility of
establishing claims facilities:
The breakthrough in Agent Orange...and the breakthrough in Dalkon Shield was a
court imposed cap on liability. That gives the company total peace.... That is why, once
the companies put the money in, they disappeared.
Even if aggregate caps are not imposed by judicial fiat, they will be imposed by de facto
economic fiat whenever the total liabilities of the defendant corporation exceed its net
assets.
Because the deterrent effect of tort law turns primarily on a defendant's total
liability, aggregate caps on damages shift the focus away from inducing efficient
precaution to a concern with the cost of implementation. The most efficient way to
distribute damage awards is to minimize the transaction costs in compensating victims.
A large component of the transaction costs in compensating mass tort victims concerns
the cost of individualized proof of damage and causation. Categorical compensation
systems of claims facilities have the potential to increase dramatically the percentage of
the defendant's aggregate damages that is actually paid to mass tort victims.
Categorical compensation of mass tort victims is likely to be Kaldor-Hicks
efficient relative to traditional individualized litigation, because such a distribution
system will increase the average compensation for victims. It may be difficult, however,
to construct categorical compensation packages that are also Pareto-efficient relative to
litigation. The pooling of dissimilar victims into dissimilar categories often results in
some claimants receiving less damages from a claims facility than from litigation. This
will be especially true if categorical compensation systems induce claimants to file
frivolous actions that dilute the average compensation in the pool.
The adverse selection of frivolous claimants represents an important transaction
cost of claims facilities that non-frivolous claimants must bear. These adverse selection
costs, in a sense, substitute for the litigation costs of individualized proof of causation
and damage. Claims facilities are most likely to be Pareto-efficient when the adverse
selection costs of claims facilities are less than the litigation costs of proof.
When categorical compensation is not Pareto-efficient, undercompensated
claimants will attempt to separate from the pool through litigation. For this reason,
claims facilities may face significant "participation constraints" in channeling claimants
to lower-cost categorical pools. In some situation, forced pooling, which denies plaintiffs
the option of individualized litigation, may be welfare enhancing.
This article is written in two parts. Part II presents a simple model of categorical
compensation to show when claims facilities are likely to be feasible and efficient. Part
III extends the model to "partial pooling" and compares these models to the facilities
discussed in this symposium. The conclusion, in a more discursive fashion, suggests
limits for this economic analysis and areas for further research.
Return to top of the Page