Non-pecuniary Losses in the Economic Analysis of Torts

The question of whether a tortfeasor should compensate non-pecuniary losses is not answered unambiguously in Law and Economics. On the one hand, to provide tortfeasors incentives for deterrence, damages should fully reflect the extent of immaterial loss. On the other hand, it is argued that to achieve optimal loss spreading, the victim should not receive damages for non-pecuniary losses if he would not selfinsure against such losses. In our view, however, such insurance decisions cannot provide guidance on whether non-pecuniary losses should be included in tort damages nor on how to assess them. We argue that ‘ex ante determined damages’, which are based on the resources a victim would have been willing to spend to avoid the non-pecuniary loss, form the correct basis for pain and suffering damages.
In our view the concept of Quality Adjusted Life Years (QALYs) from the field of health economics can be used as a measure to assess the ex ante determined damages for non-fatal injuries. QALYs can reflect the impact of different types of injuries on the quality of life of the victim. By monetizing QALYs, this impact is expressed in monetary terms, which provides a non-arbitrary basis for pain and suffering damages. As example, we compare pain and suffering damages in several European countries with the amounts that would result from the QALY-approach for various personal injuries. We show that the amounts that are currently awarded are too low, both from a (legal) compensation as well as from an (economic) incentives point of view.