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Journal of Legal Studies, Vol. 38, pp. 345-382, 2009


This paper considers the choice between an all-or-nothing rule (AON) and a proportionate damages rule (PD) in civil litigation. Under AON, a prevailing plaintiff receives a judgment equal to his entire damages. Under PD, damages are reduced to reflect uncertainty. For example, if the trier of fact found that there was a seventy-five percent chance that the defendant is liable, the judgment would equal seventy-five percent of the plaintiff's damages. Using a moral hazard model that takes into account defendants' decisions to comply with legal rules, evidentiary uncertainty, and settlement, we show that AON usually maximizes the rate of compliance, although it may result in a higher level of litigation. This, in turn, provides an efficiency rationale for the ubiquity of AON in the legal system. 

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