Deterrence and Damages: The Multiplier Principle and Its Alternatives

One purpose of fines and damage awards is to deter harmful behavior. When enforcement is imperfect, however, so the probability that any given violation will be punished is less than 100%, the law’s deterrent effect is usually thought to be reduced. Thus, it is often said that the ideal penalty (insofar as deterrence is concerned) equals the harm caused by the violation multiplied by one over the probability of punishment. For example, if a violation faces only a 25% (or one-in-four) chance of being punished, on this view the optimal penalty would be four times the harm caused by the violation. This prescription, which I will call the “multiplier principle,” has a long pedigree. It figures prominently in texts on law and economics, and has been discussed in many scholarly works. Indeed, in the law review literature the multiplier principle is now routinely cited as part of standard deterrence theory. The multiplier principle has also begun to be recognized by courts – especially by economically sophisticated judges – as a possible rationale for punitive damages. What is less widely appreciated, however, is that the multiplier principle is almost never necessary to achieving optimal deterrence. Even when the probability of punishment is less than 100%, more recent work in law and economics has identified several other remedies that could also achieve optimal deterrence. These alternative remedies are often significantly less than those called for by the multiplier principle. In some cases, the alternative remedies could even be less than the harm caused by the violation, implying that optimal deterrence could be achieved if damages were reduced. My principal aims in this article are to explain why the multiplier principle is not necessary for optimal deterrence and to begin a discussion of the alternatives. While the mathematical analysis behind the recent work is often quite technical, the basic principles are not hard to grasp, and they can be illustrated with simple numerical examples. Thus, a secondary aim is to familiarize a larger audience with the conclusions of this technical body of work. Since this work identifies alternatives to the multiplier principle, its significance is potentially as broad as that of the multiplier principle itself.