The Economic Analysis of Liability Rules from the Organizational Theory Perspective

In tort law, the behavior of individuals traditionally appears to be in the focus of both legal and economic scholars. Particularly, when accidents happen, lawyers scrutinize the acts of individuals to determine whether they were negligent or not. Economists often assume that potential tortfeasors are individuals and develop their analyses of liability rules based on this assumption. When organizational liability is involved, organizations are usually considered as principals of their insufficiently controlled agents. This paper emphasizes the organizational nature of many human errors and accidents. It introduces the organizational theory framework to the analysis of liability rules applicable to organizations. This framework goes beyond the traditional agency theory and the theory of incentives. It explains wrongdoing in organizations more broadly than it is predominantly perceived in tort law. The organizational theory framework also contributes to the explanation why tort liability rules may fail to effectively deter wrongdoing in organizations.