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When will judgment proof injurers take too much precaution?

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  • Dari-Mattiacci, Giuseppe
  • De Geest, Gerrit

Abstract

This article identifies the conditions under which potentially insolvent injurers over-invest in precaution. We show that this may happen only with respect to precautionary measures that reduce the probability of the accident. No such result occurs if precaution only reduces the magnitude of the harm. Contrary to the literature, we find that over-precaution may also occur when precaution is non-monetary. The reason being is that over-precaution can not only be due to the implicit precaution-subsidy effect (the fact that care-taking reduces the injurer’s exposure to liability when precaution is monetary) but also to a substitution effect between precaution that reduces the probability of accidents and precaution that reduces the magnitude of the harm. Finally, we find that when the injurer’s wealth is sufficiently low, precautions may actually be lower when they are monetary than when they are non-monetary, despite the implicit precaution subsidy in the former case.

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Bibliographic Info

Article provided by Elsevier in its journal International Review of Law and Economics.

Volume (Year): 26 (2006)
Issue (Month): 3 (September)
Pages: 336-354

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Handle: RePEc:eee:irlaec:v:26:y:2006:i:3:p:336-354

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Web page: http://www.elsevier.com/locate/irle

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  1. T. Randolph Beard, 1990. "Bankruptcy and Care Choice," RAND Journal of Economics, The RAND Corporation, vol. 21(4), pages 626-634, Winter.
  2. Schmitz, Patrick W., 2000. "On the joint use of liability and safety regulation," International Review of Law and Economics, Elsevier, vol. 20(3), pages 371-382, September.
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  4. Dionne, Georges & Eeckhoudt, Louis, 1985. "Self-insurance, self-protection and increased risk aversion," Economics Letters, Elsevier, vol. 17(1-2), pages 39-42.
  5. Steven Shavell, 2002. "Minimum Asset Requirements," NBER Working Papers 9335, National Bureau of Economic Research, Inc.
  6. Christian Gollier & Pierre-François Koehl & Jean-Charles Rochet, 1996. "Risk-Taking Behavior with Limited Liability and Risk Aversion," Center for Financial Institutions Working Papers 96-13, Wharton School Center for Financial Institutions, University of Pennsylvania.
  7. Steven Shavell, 1983. "Liability for Harm Versus Regulation of Safety," NBER Working Papers 1218, National Bureau of Economic Research, Inc.
  8. Ehrlich, Isaac & Becker, Gary S, 1972. "Market Insurance, Self-Insurance, and Self-Protection," Journal of Political Economy, University of Chicago Press, vol. 80(4), pages 623-48, July-Aug..
  9. Richard MacMinn, 2002. "On the Judgment Proof Problem," The Geneva Risk and Insurance Review, Palgrave Macmillan, vol. 27(2), pages 143-152, December.
  10. Boyd, James & Ingberman, Daniel E., 1999. "Do punitive damages promote deterrence?1," International Review of Law and Economics, Elsevier, vol. 19(1), pages 47-68, March.
  11. Juan José Ganuza & Fernando Gómez, 2003. "Optimal negligence rule under limited liability," Economics Working Papers 759, Department of Economics and Business, Universitat Pompeu Fabra, revised May 2004.
  12. Boyd, James & Ingberman, Daniel E, 1994. "Noncompensatory Damages and Potential Insolvency," The Journal of Legal Studies, University of Chicago Press, vol. 23(2), pages 895-910, June.
  13. Rose-Ackerman, Susan, 1991. "Regulation and the Law of Torts," American Economic Review, American Economic Association, vol. 81(2), pages 54-58, May.
  14. G. Dari Mattiacci & Geert de Geest, 2003. "Judgement Proofness under Four Different Precaution Technologies," Working Papers 03-16, Utrecht School of Economics.
  15. Thomas J. Miceli & Kathleen Segerson, 2001. "A Note on Optimal Care by Wealth-Constrained Injurers," Working papers 2002-44, University of Connecticut, Department of Economics, revised May 2002.
  16. Kahan, Marcel, 1989. "Causation and Incentives to Take Care under the Negligence Rule," The Journal of Legal Studies, University of Chicago Press, vol. 18(2), pages 427-47, June.
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Citations

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Cited by:
  1. G.G.A. de Geest & G. Dari Mattiacci, 2005. "Soft Regulators, though judges," Working Papers 05-06, Utrecht School of Economics.
  2. Sandrine SPAETER & Julien JACOB, 2014. "Large-scale risks and technological change: What about limited liability?," Working Papers of BETA 2014-10, Bureau d'Economie Théorique et Appliquée, UDS, Strasbourg.
  3. Guiseppe Dari-Mattiacci, 2006. "Limiting Limited Liability," Tinbergen Institute Discussion Papers 06-070/1, Tinbergen Institute.
  4. Giuseppe Dari-Mattiacci & Gerrit De Geest, 2005. "Judgment Proofness under Four Different Precaution Technologies," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 161(1), pages 38-, March.
  5. Tim Friehe, 2008. "On judgment proofness in the case of bilateral harm," European Journal of Law and Economics, Springer, vol. 26(2), pages 175-185, October.
  6. Gérard Mondello, 2012. "Strict Liability, Capped Strict Liability, and Care Effort under Asymmetric Information," Post-Print hal-00727213, HAL.
  7. Juan José Ganuza & Fernando Gómez, 2003. "Optimal negligence rule under limited liability," Economics Working Papers 759, Department of Economics and Business, Universitat Pompeu Fabra, revised May 2004.
  8. Nussim, Jacob & Tabbach, Avraham D., 2009. "A revised model of unilateral accidents," International Review of Law and Economics, Elsevier, vol. 29(2), pages 169-177, June.
  9. repec:ebl:ecbull:v:11:y:2006:i:1:p:1-7 is not listed on IDEAS
  10. Tim Friehe, 2007. "A note on judgment proofness and risk aversion," European Journal of Law and Economics, Springer, vol. 24(2), pages 109-118, October.
  11. van 't Veld, Klaas & Hutchinson, Emma, 2009. "Excessive spending by firms to avoid accidents: Is it a concern in practice?," International Review of Law and Economics, Elsevier, vol. 29(4), pages 324-335, December.

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