Integrating Punishment and Efficiency Concerns in Punitive Damages for Reckless Disregard of Risks to Others

Punitive damages deter and punish. Using a social welfare function that incorporates both economic efficiency and a desire for retribution, this paper explores the effects of punitive damages in situations of reckless disregard that might be viewed as outrageous. If the defendant was making a rational decision that reflected all of social costs, any level of punitive damages lowers efficiency. If there are inadequacies of compensatory damages, the costs borne by the defendant are less than the full social costs. Then, punitive damages may be able to improve economic efficiency as well as providing retribution. Also considered is deterrence of nonrational reckless disregard (e.g., drunk driving) along with retribution. Optimal punitive damages to balance both concerns is compared with the level which would be best considering only retribution, and the level which would be best considering only economic efficiency. In some situations, consideration of both deterrence and retribution argues for an intermediate level of punitive damages; in others it can call for higher or lower damages than either of the levels considering just a single issue