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Bilateral Accidents with Intrinsically Interdependent Costs of Precaution

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  • Dhammika Dharmapala
  • Sandra A. Hoffmann

Abstract

The standard economic model of bilateral precaution postulates that the care that is taken by injurers and victims affects only expected accident loss. This paper considers situations in which each party’s precaution also directly affects the other party’s cost of taking precaution. When this additional externality is introduced into a model of unilateral harm, none of the standard tort liability rule induce socially optimal behavior by both parties. Moreover, under a contributory negligence rule, the only equilibrium is in mixed strategies; this gives rise to the possibility of litigation in equilibrium. “Tortlike” liability rules that can induce socially optimal care by both parties are characterized. The model is then extended to consider the case of bilateral harm, in which all negligence-based tort rules lead to socially optimal care by both parties, as long as each can sue to recover its full accident losses.

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Bibliographic Info

Article provided by University of Chicago Press in its journal The Journal of Legal Studies.

Volume (Year): 34 (2005)
Issue (Month): 1 (01)
Pages: 239-272

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Handle: RePEc:ucp:jlstud:v:34:y:2005:p:239-272

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References

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  1. Steven Shavell, 2003. "Economic Analysis of Accident Law," NBER Working Papers 9694, National Bureau of Economic Research, Inc.
  2. Hindley, Brian & Bishop, Bill, 1983. "Accident liability rules and externality," International Review of Law and Economics, Elsevier, vol. 3(1), pages 59-68, June.
  3. Hoffmann, Sandra & Schwartz, Warren & Dharmapala, Dhammika, 2001. "A Neglected Interdependency in Liability Theory," Discussion Papers dp-01-13, Resources For the Future.
  4. 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.
  5. 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.
  6. Shavell, S., 1986. "The judgment proof problem," International Review of Law and Economics, Elsevier, vol. 6(1), pages 45-58, June.
  7. 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.
  8. Arlen, Jennifer H., 1990. "Re-examining liability rules when injurers as well as victims suffer losses," International Review of Law and Economics, Elsevier, vol. 10(3), pages 233-239, December.
  9. Arlen, Jennifer H, 1992. "Liability for Physical Injury When Injurers as Well as Victims Suffer Losses," Journal of Law, Economics and Organization, Oxford University Press, vol. 8(2), pages 411-26, April.
  10. Emons,Winand & Sobel,Joel, 1988. "On the effectiveness of liability rules when agents are not identical," Discussion Paper Serie A 212, University of Bonn, Germany.
  11. Leong, Avon K., 1989. "Liability rules when injurers as well as victims suffer losses," International Review of Law and Economics, Elsevier, vol. 9(1), pages 105-111, June.
  12. 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.
  13. Craswell, Richard & Calfee, John E, 1986. "Deterrence and Uncertain Legal Standards," Journal of Law, Economics and Organization, Oxford University Press, vol. 2(2), pages 279-303, Fall.
  14. Steven Shavell, 1983. "Liability for Harm Versus Regulation of Safety," NBER Working Papers 1218, National Bureau of Economic Research, Inc.
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Cited by:
  1. Friehe, Tim, 2009. "Sequential torts and bilateral harm," International Review of Law and Economics, Elsevier, vol. 29(2), pages 161-168, June.
  2. Ram Singh, 2006. "On the Existence and Efficiency of Equilibria under Liability Rules," Working papers 150, Centre for Development Economics, Delhi School of Economics.
  3. 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.
  4. Dari-Mattiacci, Giuseppe & Langlais, Eric, 2012. "Social Wealth and Optimal Care," International Review of Law and Economics, Elsevier, vol. 32(2), pages 271-284.
  5. Tim Friehe & Eric Langlais, 2014. "On the Political Economy of Public Safety Investments," EconomiX Working Papers 2014-8, University of Paris West - Nanterre la Défense, EconomiX.
  6. Giuseppe Dari-Mattiacci & Bruno Lovat & Francesco Parisi, 2014. "Loss-sharing between Nonnegligent Parties," Working Papers of BETA 2014-06, Bureau d'Economie Théorique et Appliquée, UDS, Strasbourg.
  7. Nuno Garoupa, 2009. "Least-Cost Avoidance: The Tragedy of Common Safety," Journal of Law, Economics and Organization, Oxford University Press, vol. 25(1), pages 235-261, May.

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