abstract. In order to regulate risk-taking efficiently, tort liability rules governing organizations' liability for torts by their agents must ensure that organizations both want their agents to take cost-effective precautions and benefit from using all cost-effective mechanisms to regulate agents. This chapter shows that vicarious liability, the current the rule governing organizations' liability for their agents' torts, does not satisfy these objectives. By holding organizations liable for torts committed by employees, but not by independent contractors, vicarious liability discourages organizations from asserting direct control over agents, even when control is the efficient way to induce optimal care. Organizations governed by vicarious liability also do not employ all cost-efficient tools available to them to induce efficient care-taking by independent contractors because organizations do not maximize profits by inducing efficient care. Indeed, vicarious liability encourages organizations to undermine the effect of individual tort liability by hiring judgment-proof independent contractors.

INTRODUCTION

Tort liability is essential to the effective functioning of a free market economy because it encourages people who impose risks on others to take cost-justified precautions to reduce the expected costs of their activities. In order for tort liability to fulfill its promise, it must provide efficient incentives to organizations, as well as individuals. Torts often are caused by individuals working for, and under the influence of, organizations (generally corporations). These organizations are not passive bystanders, but instead ultimately determine whether agents strive to take cost-effective precautions against harm.