Disgorgement Damages for Accidents

Under the usual tort rules, damages for an accident equal the victim’s loss (compensation). This paper departs from current law by proposing damages equal to the injurer’s gain from untaken precaution divided by the probability of liability. Known as disgorgement damages for accidents (DDA), it is the minimum liability necessary to provide injurers with efficient incentives for care. We distinguish three forms of DDA with different information requirements and the same incentive effects.

Because DDA is smaller than compensation, it typically induces more activity by injurers and less activity by victims. Calculating DDA generally requires different information than calculating compensation. Consequently, some imperfections in information cause courts to distort incentives for care under compensatory damages and not under DDA, while others have the opposite effect. Furthermore, the smaller disgorgement damages compared with compensation damages can shrink or magnify the distortion in incentives for care caused by courts’ and injurers’ errors.