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Due-care standards in a market setting with legal error

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  • Bhole, Bharat

Abstract

We consider a monopoly market setup with legal error, where social welfare is negatively related to a firm's expected liability costs. In this context, we investigate the optimal location of the due-care standard vis-à-vis any given desired care level. It is found that when both the due-care standard and the penalty multiplier are choice variables, setting the due-care equal to the desired care is unlikely to be optimal and conditions under which it should be made relatively lenient or stringent are obtained. Exogenous restrictions on the penalty multiplier may restrict the extent to which the due-care can be manipulated to improve welfare.

Suggested Citation

  • Bhole, Bharat, 2007. "Due-care standards in a market setting with legal error," International Review of Law and Economics, Elsevier, vol. 27(2), pages 154-169.
    • Handle: RePEc:eee:irlaec:v:27:y:2007:i:2:p:154-169
    DOI: 10.1016/j.irle.2007.06.004
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    References listed on IDEAS

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    1. Kaplow, Louis & Shavell, Steven, 1994. "Accuracy in the Determination of Liability," Journal of Law and Economics, University of Chicago Press, vol. 37(1), pages 1-15, April.
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    6. Polinsky, A Mitchell & Shavell, Steven, 1989. "Legal Error, Litigation, and the Incentive to Obey the Law," The Journal of Law, Economics, and Organization, Oxford University Press, vol. 5(1), pages 99-108, Spring.
    7. Craswell, Richard, 1996. "Damage Multipliers in Market Relationships," The Journal of Legal Studies, University of Chicago Press, vol. 25(2), pages 463-492, June.
    8. Mas-Colell, Andreu & Whinston, Michael D. & Green, Jerry R., 1995. "Microeconomic Theory," OUP Catalogue, Oxford University Press, number 9780195102680.
    9. Steven Shavell, 1984. "A Model of the Optimal Use of Liability and Safety Regulation," RAND Journal of Economics, The RAND Corporation, vol. 15(2), pages 271-280, Summer.
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    Cited by:

    1. BOYER, Marcel & PORRINI, Donatella, 2010. "Optimal Liability Sharing and Court Errors : An Exploratory Analysis," Cahiers de recherche 05-2010, Centre interuniversitaire de recherche en économie quantitative, CIREQ.
    2. Florian Baumann & Tim Friehe, 2015. "Optimal Damages Multipliers in Oligopolistic Markets," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 171(4), pages 622-640, December.
    3. Boyer, Marcel & Porrini, Donatella, 2011. "The impact of court errors on liability sharing and safety regulation for environmental/industrial accidents," International Review of Law and Economics, Elsevier, vol. 31(1), pages 21-29, March.
    4. Bhole, Bharat & Wagner, Jeffrey, 2008. "The joint use of regulation and strict liability with multidimensional care and uncertain conviction," International Review of Law and Economics, Elsevier, vol. 28(2), pages 123-132, June.
    5. Alfred Endres & Tim Friehe, 2014. "The reasonable person standard: trading off static and dynamic efficiency," European Journal of Law and Economics, Springer, vol. 37(2), pages 249-267, April.

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    More about this item

    Keywords

    Legal error; Negligence; Due-care standard; Penalty multiplier;
    All these keywords.

    JEL classification:

    • K13 - Law and Economics - - Basic Areas of Law - - - Tort Law and Product Liability; Forensic Economics
    • K32 - Law and Economics - - Other Substantive Areas of Law - - - Energy, Environmental, Health, and Safety Law

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