Arlen 1994 also identifies a second circumstance in

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Arlen (1994) also identifies a second circumstance in which holding firms vicariously liable for the intentional wrongdoing of agents can generate perverse incentives and increase enforcement costs. In cases where misconduct is difficult to detect, the firm may enjoy a comparative advantage over outsiders in monitoring for it. Yet the firm will not monitor optimally under a vicarious liability regime - and may not monitor at all - if the information that the firm acquires can be used to increase its own probability of incurring liability. The reason is straightforward: increased monitoring lowers the firm’s expected liability costs by raising its ability to deter or prevent misconduct, but increased monitoring also raises the firm’s expected liability costs by increasing the probability that, should misconduct occur, the firm will be held liable for it. Although Arlen (1994) directs her analysis to corporate crimes, the ‘potentially perverse’ effect that she identifies clearly extends to vicarious civil liability for torts that may be difficult to detect without monitoring by the principal. A related observation, made in Arlen and Kraakman (1997, pp. 712-717), is that a credibility problem may arise where strict vicarious liability is used to induce firms to monitor or investigate misconduct. The nub of the problem is that, absent a commitment device such as reputation, firms may not have an incentive to actually monitor, or to investigate and report misconduct after it has occurred. While credible threats to implement these measures would deter misconduct, the measures themselves add nothing under a vicarious liability rule except enforcement costs and enhanced liability risks for firms. The danger, then, is that some firms may not be able to make credible enforcement threats - even if they intend to carry them out - because wayward agents rightly suspect that actually implementing these enforcement measures would be acting against interest. By contrast, an element of duty-based liability such as a negligence rule can assure the credibility of enforcement threats, just as it can overcome the perverse effects associated with traditional vicarious liability (Arlen and Kraakman, 1997, pp. 717-718). Lastly, a novel set of problems associated with strict vicarious liability arises in the context of government bodies and certain non-profits that are not subject to ordinary market constraints. While the aims of inducing optimal caretaking, self-policing, and efficient risk-bearing arguably support vicarious liability for such non-market entities just as they do for business corporations, the argument for this liability rule based on the need to regulate activity levels does not (see Kramer and Sykes, 1987, pp. 278-283). It is simply unclear how cost internalization affects the scale of the non-market enterprise - it might yield too much or too little activity (Kramer and Sykes, 1987, p. 286). For this reason, a duty-based or negligence-based liability regime might be preferred to strict vicarious liability for non-market entities such as cities (Kramer and Sykes,
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  • Spring '12
  • Scott
  • Tort Law, Corporate Civil Liability

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