1. Ronald Coase, The Problem of Social Cost, 3 Journal of Law and Economics 1 (1960).
2. William M. Landes and Richard A. Posner, The Economic Structure of Tort Law , Harvard University Press, Cambridge 1987.
3. The problem is raised (in a somewhat different context) in Landes and Posner, The Private Enforcement of Law, 4 J. Legal Studies 1 (1975). It is solved, under the assumption that the costs of the suit to the defendant are observable and fixed , in David Friedman, "Efficient Institutions for the Private Enforcement of Law." Journal of Legal Studies , June 1984. Just as with accidents, the rule that gives one party (the victim) the right incentive (to bring suit) gives the other party the wrong incentive (with regard to how much he spends on his defense). Shavell does not discuss this literature.
4. This point is discussed in David Friedman, "What is Fair Compensation for Death or Injury?" International Review of Law and Economics , 2, 1982.