The paper deals with a bilateral accident situation in which victims have heterogeneous costs of care. With perfect information, efficient care by the injurer raises with the victim's cost. When the injurer cannot observe at all the victim's type, and this fact can be verified by Courts, first-best cannot be implemented with the use of a negligence rule based on the first-best levels of care. Second-best leads the injurer to intermediate care, and the two types of victims to choose the best response to it. We explore in particular detail the more interesting case of imperfect observation of the victim's type, characterizing the optimal solution and examining the different legal alternatives when Courts cannot verify the injurers' statements. Counterintuitively, we show that there is no difference at all between the use by Courts of a rule of complete trust and a rule of complete distrust towards the injurers' statements. We then relate the findings of the model to existing rules and doctrines in Common Law and Civil Law legal systems.
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Find related papers by JEL classification: K13 - Law and Economics - - Basic Areas of Law - - - Tort Law and Product Liability D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information