Tort Arbitrage

The economic models of bargaining and tort law have not been integrated into a coherent theory that reflects the empirical world. This Article models the interaction of settlement dynamics and the theory of negligence. It shows that tort claims are systematically devalued during settlement relative to the legal standard. Central to this thesis is a proper conception and accounting of cost. Cost is typically viewed as the transaction cost of litigation processing. Cost, however, encompasses more than this. Each dispute has a cost of resolution, defined as the discounting effect of risk on legal valuation. A spread between the parties' respective costs of resolution presents an arbitrage opportunity in which the bargaining process represents superior pricing that of the public forum. As long as settlement is the primary method of dispute resolution, tort law is structurally incapable of maintaining the efficient standard of care as courts aspire. Under this analysis, the fault standard is both an instrument of valuation and a cost-shifting mechanism. It devalues the litigation asset, thus reducing liability. The effect is to promote a system of self-regulation of accidents in the shadow of uncertain government pricing. These functionalities connect the historical origins of negligence to its ¿unexpected persistence¿ today. Negligence maintains the essentially private nature of tort law even as it touches social policy and public conscience