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The impact of court errors on liability sharing and safety regulation for environmental/industrial accidents

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  • Boyer, Marcel
  • Porrini, Donatella

Abstract

We focus in this paper on the effects of court errors on the optimal sharing of liability between firms and financiers, as an environmental policy instrument. Using a structural model of the interactions between firms, financial institutions, governments and courts we show, through numerical simulations, the distortions in liability sharing between firms and financiers that the imperfect implementation of government policies implies. We consider in particular the role played by the efficiency of the courts in jointly avoiding Type I (finding an innocent firm guilty of inappropriate care) and Type II (finding a guilty firm not guilty of inappropriate care) errors. This role is considered in a context where liability sharing is already distorted (when compared with first best values) due not only to the courts' own imperfect assessment of safety care levels exerted by firms but also to the presence of moral hazard and adverse selection in financial contracting. There is also not congruence of objectives between firms and financiers on the one hand and social welfare maximization on the other. Our results indicate that an increase in the efficiency of court system in avoiding errors raises safety care level, thereby reducing the probability of accident, and allowing the social welfare maximizing government to impose a lower liability [higher] share for firms [financiers] as well as a lower standard level of care.

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Bibliographic Info

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

Volume (Year): 31 (2011)
Issue (Month): 1 (March)
Pages: 21-29

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Handle: RePEc:eee:irlaec:v:31:y:2011:i:1:p:21-29

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

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Keywords: Environmental policy Court efficiency Liability sharing Regulation Incomplete information;

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References

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  1. Marco, Alan C., 2005. "Learning by Suing: Structural Estimates of Court Errors in Patent Litigation," Vassar College Department of Economics Working Paper Series 68, Vassar College Department of Economics.
  2. Dominique Demougin & Claude Fluet, 2008. "Rules of proof, courts, and incentives," RAND Journal of Economics, RAND Corporation, vol. 39(1), pages 20-40.
  3. Marcel Boyer & Jean-Jacques Laffont, 1995. "Environmental Protection, Producer Insolvency and Lender Liability," CIRANO Working Papers 95s-50, CIRANO.
  4. Andrew F. Daughety & Jennifer F. Reinganum, 2003. "Markets, Torts and Social Inefficiency," Vanderbilt University Department of Economics Working Papers 0308, Vanderbilt University Department of Economics.
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  9. Andrei Shleifer, 2010. "Efficient Regulation," NBER Working Papers 15651, National Bureau of Economic Research, Inc.
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  13. Marcel Boyer & Tracy Lewis & Wei Lin Liu, 1996. "Setting Standards for Credible Compliance and Law Enforcement," CIRANO Working Papers 96s-27, CIRANO.
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  15. Kaplow, Louis, 1994. "The Value of Accuracy in Adjudication: An Economic Analysis," The Journal of Legal Studies, University of Chicago Press, vol. 23(1), pages 307-401, January.
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  18. Innes, Robert, 2004. "Enforcement costs, optimal sanctions, and the choice between ex-post liability and ex-ante regulation," International Review of Law and Economics, Elsevier, vol. 24(1), pages 29-48, March.
  19. 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.
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  21. Fluet, Claude, 2010. "Liability rules under evidentiary uncertainty," International Review of Law and Economics, Elsevier, vol. 30(1), pages 1-9, March.
  22. Boyer, M. & Dionne, G., 1982. "Riscophobie et Etalement a Moyenne Constante: Analyse et Applications," Cahiers de recherche 8229, Universite de Montreal, Departement de sciences economiques.
  23. Shavell, S., 1986. "The judgment proof problem," International Review of Law and Economics, Elsevier, vol. 6(1), pages 45-58, June.
  24. Kolstad, Charles D & Ulen, Thomas S & Johnson, Gary V, 1990. "Ex Post Liability for Harm vs. Ex Ante Safety Regulation: Substitutes or Complements?," American Economic Review, American Economic Association, vol. 80(4), pages 888-901, September.
  25. Philippe Mahenc & Marcel Boyer & Michel Moreaux & Jean-Jacques Laffont, 1991. "Concurrence spatiale et distorsions de localisation en information incomplète," Revue économique, Presses de Sciences-Po, vol. 0(6), pages 1047-1088.
  26. Claudia M. Landeo & Maxim Nikitin & Scott Baker, 2007. "Deterrence, Lawsuits, and Litigation Outcomes Under Court Errors," Journal of Law, Economics and Organization, Oxford University Press, vol. 23(1), pages 57-97, April.
  27. Bisso, Juan Carlos & Choi, Albert H., 2008. "Optimal agency contracts: The effect of vicarious liability and judicial error," International Review of Law and Economics, Elsevier, vol. 28(3), pages 166-174, September.
  28. 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.
  29. Png, I. P. L., 1987. "Litigation, liability, and incentives for care," Journal of Public Economics, Elsevier, vol. 34(1), pages 61-85, October.
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  31. Boyd, James, 2001. "Financial Assurance Rules and Natural Resource Damage Liability: A Working Marriage?," Discussion Papers dp-01-11, Resources For the Future.
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