An efficient tort liability system is an important ingredient for a thriving free-enterprise economy. It ensures that businesses and individuals have proper incentives to produce safe products and provide safe services, and that true victims are fully compensated. A tort system of that kind encourages greater trust among market participants, more economic activity and employment, and eventually a higher standard of living for individuals in the society. An optimal tort system provides maximum net benefits to society.

An inefficient tort system, on the other hand, imposes excessive costs on society, not the least of which is forgone production of goods and services. There is growing evidence that tort costs in the United States are far greater than in other countries, and that much of the difference is due to excessive litigation and lawsuit abuse.

All of us shoulder the burden of an excessively expensive and inefficient tort liability system through higher prices, lower wages, decreased returns on investments in capital and land, restricted access to health care, and less innovation. Businesses that spend more money each year on liability insurance have less money available for research and development, or for health benefits for their employees. All of us pay the price, whether we realize it or not.

There is growing evidence that today's U.S. tort system as a whole, and especially the system in certain states, is a net cost to society at the margin. In a new study, U.S. Tort Liability Index: 2010 Report (available at pacificresearch.org), we measure which states impose the highest, and the lowest, tort liability costs both in absolute and in relative terms. Our study also measures relative tort litigation risks across states. Moreover, it examines which states have rules on the books that, if implemented and enforced, help reduce lawsuit abuse and tort costs, resulting in a more balanced, predictable, and affordable civil-justice system.

The U.S. tort system is an industry, and, like any industry, it consists of inputs and outputs. Tort-system inputs include such things as courthouses, judges, juries, clerks, copying machines, law libraries, and the tort rules and procedures on the books that shape tort outputs.

Tort-system outputs consist of cases filed, personal-injury lawyers to file and handle the cases, damage awards, and settlement amounts. In short, the outputs from the U.S. tort liability system consist of monetary tort losses and tort litigation risks.

Our report uses comprehensive, hard data on all 50 states to assess separately the outputs and inputs of each state's tort system and rank the states accordingly. We selected the variables after consulting with dozens of legal scholars, economists, university professors, insurance experts, and lawyers, and after an exhaustive search of the scholarly academic literature.

Our report measures outputs using 13 variables and then ranks the states from best to worst. The Index is ordinally driven, meaning that each state is compared to the other 49 states across all variables. The 13 output variables are grouped into two categories: monetary tort losses and tort litigation risks. The output rankings are free of any subjective bias of the report's authors-they are based solely on outside, independent data.

The inputs to the U.S. tort liability system include the rules on the books in each state that shape its tort-system outputs-its monetary tort losses and tort litigation risks. Tort rules can be crafted by voters, legislators, and/or judges, either directly or indirectly, in each state. It is helpful to think of tort rules as the dials that can be turned to influence the final outputs of the tort system.

Our report uses 29 variables to rank each state's tort rules. These 29 input variables are grouped into three categories: monetary caps, substantive-law rules, and procedural and structural institutions. We judged how effective, stringent, rigid, or binding each variable was in each state based on current statutory law or on court decisions/common law.

The state that has the best tort rules on the books-and that will be heading in the right direction if the rules are fully implemented-is Oklahoma, followed by Texas, Ohio, Colorado, and Mississippi. States that implement meaningful tort reform challenge their neighbors to do the same or be at a competitive disadvantage in the battle to attract people and capital. Oklahoma's 2009 reforms, for example, were largely driven by the earlier reforms adopted in neighboring Texas.

By merging the output and input results, we can divide the states into four groups: saints, sinners, salvageables, and suckers.

Briefly, the saints are states that have relatively low monetary tort losses and/or low tort litigation risks and relatively strong tort rules on the books. These five states are well positioned to contain their tort liability costs in the future if the rules are implemented as written.

The sinners are states that have relatively high monetary tort losses and/or high tort litigation risks and relatively weak tort rules on the books. The 20 sinners are likely to face high and rising tort liability costs in the future if lawsuit abuse continues unchecked.

The salvageables are states that have moderate to high relative monetary tort losses and/or moderate to high tort litigation risks, yet have moderate to strong tort rules, probably as a result of recent reforms. If the rules are implemented as written on the books, the 16 salvageables, including Oklahoma, are positioned to do a better job of containing their tort liability costs and to move up in future output rankings as the benefits of reform feed back to improve outputs.

The suckers are the nine states that have weak tort rules on the books because they currently have relatively low monetary tort losses and/or low tort litigation risks and, therefore, believe that reform is not needed.

Our study also examines evidence from today's top economists and legal scholars on the benefits of lawsuit reform in people's lives. We review important research findings that have emerged since our previous edition was published in 2008. The studies document that lawsuit reform can cut insurance premiums; increase productivity, employment, output, earnings, and the tax base; boost innovation and sales of new products; lower health care costs while improving health care access; and save lives.

Connecting this evidence to the U.S. Tort Liability Index leads to one vital conclusion: A better index ranking for a state-achieved through a commitment to meaningful lawsuit reform-translates, everything else being equal, into a better legal environment in which to invest human, physical, and financial capital, the ingredients for self-sustaining economic growth and personal prosperity. Given these profound and sweeping benefits, state lawmakers and ordinary citizens would be wise to promote and enact legal reforms that eliminate lawsuit abuse.

Lawrence J. McQuillan (Ph.D., George Mason University) is director of business and economic studies and senior fellow in political economy at the Pacific Research Institute (PRI) in San Francisco. He is a coauthor of the U.S. Economic Freedom Index, published with Forbes, which ranks the 50 states according to how friendly or unfriendly their state-government policies are to free enterprise and consumer choice.

Hovannes Abramyan (B.A., University of California, Berkeley) is a public policy fellow in business and economic studies at PRI.