Potential defendants faced with the prospect of tort or tort-like damage actions can reduce their liability exposure in a number of ways. Prior scholarship has dwelled primarily on the possibility that they may respond to the threat of liability by augmenting the amount of care they take.1 Defendants (I limit myself to defendants for simplicity) will increase their expenditures on care, so the theory goes, when those expenditures yield sufficient liability-reducing dividends; more care decreases liability exposure by simultaneously making it less likely that the actors will be found to have behaved tortiously in the event of an accident and subsequent lawsuit, and by shrinking the probability and perhaps the severity of accidents. What prior scholarship has not focused on is that even contemplated behavioral changes-in the type rather than amount of care defendants take, or the type rather than amount of harm they inflict-that do nothing to shift the probability or severity of accidents may, in many circumstances, limit expected liability by lowering the probability of claims or losses, or the expected amount of damages. In particular, I argue in this paper that potential litigation can induce potential defendants to favor more cognizable or demonstrable care, and less cognizable or demonstrable harm. The circumstances in which I am interested abound. For example, in negligence law, some types of care are well suited to documentary proof, others need testimony, and still others are not well suited to courtroom proof at all. So because the substantive law of negligence is inevitably inflected by the litigation system, the expected value of damages varies, not only with the cost of care and the resulting level of accidents, but with that care's ease of proof. The result of this fact-stated most generally, that damages are not sirr.ply a function of the cost and yield of care-is what I term a "substitution effect": in my example above, potential defendants are likely to anticipate the combination of tort law and litigation and respond by substituting accident- avoidance measures that are easier to prove up for those that are harder, all other things being equal.
Schlanger, Margo. "Second Best Damage Action Deterrence." DePaul L. Rev. 55, no. 2 (2006): 517-37.