But-for Causation and the Implementability of Compensatory Damages Rules

Abstract

A damages rule is called compensatory if it requires compensation of each party who complied with the due care standard for harm caused by deficient precaution of the other party. The two main contributions of this article are as follows. First, we show that any Nash equilibrium of the game induced by a compensatory damages rule enhances welfare compared to the welfare that would have been attained if both parties had complied. This is true irrespective of whether the due care standards are set at their socially optimal level. Second, we provide a general result for evaluating the conditions under which courts have sufficient information to implement compensatory damages rules. This is the case when the available evidence allows courts to determine whether the injurer’s precaution choice was the but-for cause of any harm to the victim. The exact levels of precaution and harm need not be observable (JEL K13).