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Uncertain Litigation and Liability Insurance

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  • Bharat Sarath

Abstract

Legal penalties and liability insurance seem to have counteracting effects on the incentives of a potential injurer to take due care. However, if legal penalties are set efficiently and implemented perfectly, unrestricted access to insurance can be optimal. In contrast, if the standards of guilt assessment are uncertain, the size of the legal penalties may act as a spur to litigation. Therefore, the penalties required to maintain incentives when access to insurance is unlimited may provoke too much litigation, and as a consequence, the costs of ensuring due care may decline when insurance is restricted by mandate.

Suggested Citation

  • Bharat Sarath, 1991. "Uncertain Litigation and Liability Insurance," RAND Journal of Economics, The RAND Corporation, vol. 22(2), pages 218-231, Summer.
    • Handle: RePEc:rje:randje:v:22:y:1991:i:summer:p:218-231
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    Citations

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    Cited by:

    1. Aaron Finkle, 2010. "Contracts in the Shadow of the Law: Optimal Litigation Strategies within Organizations," International Journal of Business and Economics, School of Management Development, Feng Chia University, Taichung, Taiwan, vol. 9(2), pages 131-155, August.
    2. Boyer, Martin, 2014. "Directors’ and officers’ insurance and shareholder protection," Journal of Financial Perspectives, EY Global FS Institute, vol. 2(1), pages 107-128.
    3. Carlos Corona & Ramandeep S. Randhawa, 2010. "The Auditor's Slippery Slope: An Analysis of Reputational Incentives," Management Science, INFORMS, vol. 56(6), pages 924-937, June.
    4. Marie‐Cécile Fagart & Claude Fluet, 2009. "Liability insurance under the negligence rule," RAND Journal of Economics, RAND Corporation, vol. 40(3), pages 486-508, September.
    5. Vickie Bajtelsmit & Jennifer Coats & Paul Thistle, 2015. "The effect of ambiguity on risk management choices: An experimental study," Journal of Risk and Uncertainty, Springer, vol. 50(3), pages 249-280, June.
    6. Rasmusen, Eric, 1995. "Predictable and unpredictable error in tort awards: The effect of plaintiff self-selection and signaling," International Review of Law and Economics, Elsevier, vol. 15(3), pages 323-345, September.
    7. John, Kose & John, Teresa A., 2006. "Managerial incentives, derivatives and stability," Journal of Financial Stability, Elsevier, vol. 2(1), pages 71-94, April.
    8. Steven Shavell, 2005. "Liability for Accidents," NBER Working Papers 11781, National Bureau of Economic Research, Inc.
    9. Eric Rasmusen, 1995. "``Predictable and Unpredictable Error in Tort Awards: The Effect of Plaintiff Self Selection and Signalling,''," Law and Economics 9506003, University Library of Munich, Germany.
    10. M. Martin Boyer, 2004. "Is the Demand for Corporate Insurance a Habit? Evidence of Organizational Inertia from Directors' and Officers' Insurance," CIRANO Working Papers 2004s-33, CIRANO.
    11. Ping Zhang, 2007. "The Impact of the Public's Expectations of Auditors on Audit Quality and Auditing Standards Compliance," Contemporary Accounting Research, John Wiley & Sons, vol. 24(2), pages 631-654, June.

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