Response: Strict Liability and Silver Bullets

Ritwik asks:

How is punishment of the guilty ‘prevention’? The owner of some small XYZ theatre may take a risk with safety standards, assuming that due to the low probability of a fire hazard, the chances that a mishap ever happens with his theatre are minimal (even though they are much greater than the chances that a fire may be set off at some other theatre that willingly follows saftey norms). If a mishap now happens, what exactly have we prevented?  [second paragraph redacted as it is already answered.]

No vaccine prevents all infections. That does not mean stop vaccination from being a preventive measure.  Inspection by government officials will not prevent all fires either – indeed, given the quality of our governance, I am sure that if it weren’t for human self-interest, India would be utterly gutted by now.

The predictable response to my point would be “So let’s improve the quality of governance then!” The answer to this is: It is easier said than done. As I have argued in my Dakshina Kannada post, good governance is a luxury that people give themselves when they are aware and educated. Setting up the civic infrastructure required for a responsive government is actually much more difficult than setting up the market infrastructure. So expecting a responsive government to be a solution to the ignorance of citizens is futile.

HiAgain reminds me of the sub-prime mess. Now the problem with arguing for regulation as the answer is, it is a failure-proof answer.  No matter how much regulation there is, it is never enough. The answer is always  more regulation. Tyler Cowen makes a list  of bank regulations already in place in the US – and after he makes the list, he realises that he has missed quite a few.  And of those regulations, it turns out that two of them have actually worsened the problem, because they provide an incentive to banks to give out more sub-prime loans than is wise (in the guise of encouraging them to lend to disadvantaged borrowers.)

The problem of increasing regulations reminds me of what Joel Spolsky wrote once about Microsoft’s delivery process. Microsoft reminded Spolsky of his grandparents who took half an hour to go from the door of their house to the car. That is because after every minor or major mishap that had taken place in their lives, they had put in place  a check to ensure that it never happenned again.  Running through all those checks meant that getting out of the door was an excruciatingly difficult process.

And Aadisht wants to know:

for strict liability to have a useful deterrent effect, court cases would have to be cleared in non-atrocious timeframes. Which is not happening right now.

Given that strict liability is not useful without a speedy judicial system, but neither is rules/checklist-based regulation, is there a reason to prefer one over the other given the current state of the Real World?

This is in fact the right question to ask. Yes, it is true that both Strict Liability and regulation require the government to do something.  If the government won’t do either,  then of course there is no point talking of it. But assuming that the government can do only one, which is the better option?

The answer is that the government should focus on Strict Liability,  because fixing this will involve fixing only the court system, whereas trying to fix the regulatory system will involve fixing fire regulations, earthquake regulations, regulation against volcano eruptions and every single mishap that can conceivably befall our people. From a cost-benefit point of view, there is no doubt as to which is the priority.

Also, one of the ways to speed up the court system would be to reduce the number of court cases. It so happens that the largest litigator is the government – and junking useless laws would be a great way to reduce the burden on the courts.

4 thoughts on “Response: Strict Liability and Silver Bullets

  1. Ravi,

    There are some tradeoffs involved here. For example, if a ‘bribe the inspector’ system exists, it’s becaue it is economically attractive – that is the amount of the bribe will typically be lower than the amount required to install the fire safety systems. Thus, there is no automatic incentive for a theatre owner to improve the safety requirements if the inspectors are removed.

    The next comparison would take into account the fiduciary responsibility in the case of a fire and the probability of a fire vs the payments as a result of improving fire safety norms or bribing. This comparison is not as obvious as the first because the two variables determining the LHS are unknown. Here, I believe that myopic thinking on the part of theatre-owners will typically lead to a decision against installing the safety norms. Some will still do the correct thing (just as some inspectors will not take the bribe and some theatre owners will install the equipment even if the bribe is cheaper).

    Your argument then simply reduces to a judgement call that the number of people doing the ‘right thing’ will be higher in the second case than in the first. There is no a priori reason why this should happen, and there is hardly any empirical evidence either (at least none that you have presented).

    Apropos the sub-prime crisis, regulation 12 was passed in 1975. If it does actually encourage the sub-prime loans in practice (instead of ‘logically in practice’), sub-prime loans should have seen an increase since 1975 or some time after that, not 2001. A lag of 26 years is too much to explain a bank’s incentives of handing out sub-prime loans due to a legislation.

    I think what HiAgain meant was the role of the National Association of Realtors and their chief economist (I forget the name) – showing the failure of a self-regulatory system.

  2. Also, this is quite a stretch.

    “The answer is that the government should focus on Strict Liability, because fixing this will involve fixing only the court system, whereas trying to fix the regulatory system will involve fixing fire regulations, earthquake regulations, regulation against volcano eruptions and every single mishap that can conceivably befall our people. From a cost-benefit point of view, there is no doubt as to which is the priority. ”

    Surely, asserting things about cost-benefit analyses without any mention of costs whatsoever is strange. The ‘fixing the court system’ can also be presented as numerous corrective measures instead of a single one as you have proposed – I’m sure you realise that the Indian judicial system taken as one single block involves significantly more people than each of the heads that you have contrasted it with.

  3. Let’s take the case of liability:The system of having strict liability is not problem-free, as you make it out to be. There are several avenues for corruption in the system i.e. apart from the ones stemming from a corrupt judiciary system. Read this story about a law firm which operated like a lawsuit factory suing corporations by co-opting with fake and corrupt litigants. In the story it is mentioned that lawsuits are such a nuisance to firms being sued that even when they know that they will eventually win, firms prefer to settle and get on with their business. In India meritless lawsuits will further burden the already overburdened courts. Big corporations of course can take recourse to highly paid lawyers and take the case to the end. However, small corporations are going to be exposed to an unecessary financial headache of dealing with frivolous lawsuits.

    A while back, Sebastian Mallaby had written a piece, giving the example of lawsuits against Merck regarding Vioxx, about how juries are biased against businesses and deliver verdicts without taking into consideration the complexities involved. So to suggest that strict liability is an ideal solution, (will prevent corruption and make companies more responsive to concerns) instead of regulation, is open to argument. Besides, billion dollar lawsuits can be absorbed by big corporations but small firms responsible for innovation and creative destruction will always find it difficult to survive in such a strict liability envvironment. Also, such lawsuits raise costs for average consumers. A company facing potential million dollar lawsuits will always factor in the cost of those frivolous lawsuits while pricing its products. It will raise costs by adding liability insurance, hiring of lawyers etc., which can be easily avoided by having a regulatory mechanism in place.

    Proliferation of such lawsuits will eventually lead to calls for tort reforms, as already happens in the US. The tort reform movement will be influenced by lobbies of big corporations. They will seek caps on punitive damages, argue that strict product liability thwarts innovation etc. Thus, they will try to create a scenario where, after already having eliminated the regulatory bodies, they don’t want to be exposed to damages resulting from liability as well.

Comments are closed.