On tort as an implicit insurance system with state-dependent utility: The case of child mortality risk

Parents deriving utility from children and their material standard of living will equate neither marginal utilities of consumption nor of income across states of the world and, contrary to claims in the literature but according with the historical record, will sometimes purchase fair insurance against child mortality risks even if a child's death reduces the marginal utility of consumption. Thus criticism of tort as an implicit insurance system should be refocused. It is not inefficient per se because it leads to payouts in death-contingent states but, rather, because the implicit third-party insurance which it provides crowds out more cost-effective first party insurance which households would and did purchase prior to the expansion of suppliers' liability under tort. (C) 1996 by Elsevier Science Inc.