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Uncertain Litigation and Liability Insurance

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  • Bharat Sarath
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    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.

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    Bibliographic Info

    Article provided by The RAND Corporation in its journal RAND Journal of Economics.

    Volume (Year): 22 (1991)
    Issue (Month): 2 (Summer)
    Pages: 218-231

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    Handle: RePEc:rje:randje:v:22:y:1991:i:summer:p:218-231

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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, College of Business, and College of Finance, Feng Chia University, Taichung, Taiwan, College of Business, and College of Finance, Feng Chia University, Taichung, Taiwan, vol. 9(2), pages 131-155, August.
    2. Eric Rasmusen, 1995. "``Predictable and Unpredictable Error in Tort Awards: The Effect of Plaintiff Self Selection and Signalling,''," Law and Economics, EconWPA 9506003, EconWPA.
    3. Marie-Cécile Fagart & Claude Fluet, 2009. "Liability insurance under the negligence rule," RAND Journal of Economics, RAND Corporation, RAND Corporation, vol. 40(3), pages 486-508.
    4. 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, Elsevier, vol. 15(3), pages 323-345, September.
    5. John, Kose & John, Teresa A., 2006. "Managerial incentives, derivatives and stability," Journal of Financial Stability, Elsevier, Elsevier, vol. 2(1), pages 71-94, April.

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