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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. Hindley, Brian & Bishop, Bill, 1983. "Accident liability rules and externality," International Review of Law and Economics, Elsevier, vol. 3(1), pages 59-68, June.
  2. 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.
  3. Hoffmann, Sandra & Schwartz, Warren & Dharmapala, Dhammika, 2001. "A Neglected Interdependency in Liability Theory," Discussion Papers dp-01-13, Resources For the Future.
  4. Steven Shavell, 1983. "Liability for Harm Versus Regulation of Safety," NBER Working Papers 1218, National Bureau of Economic Research, Inc.
  5. Steven Shavell, 2003. "Economic Analysis of Accident Law," NBER Working Papers 9694, National Bureau of Economic Research, Inc.
  6. Shavell, S., 1986. "The judgment proof problem," International Review of Law and Economics, Elsevier, vol. 6(1), pages 45-58, June.
  7. 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.
  8. 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.
  9. Schmitz, Patrick W., 2000. "On the Joint Use of Liability and Safety Regulation," MPRA Paper 12536, University Library of Munich, Germany.
  10. 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.
  11. 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.
  12. 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.
  13. 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.
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Cited by:
  1. Ram Singh, 2006. "On the Existence and Efficiency of Equilibria Under Liability Rules," NBER Working Papers 12625, National Bureau of Economic Research, Inc.
  2. 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.
  3. Friehe, Tim, 2009. "Sequential torts and bilateral harm," International Review of Law and Economics, Elsevier, vol. 29(2), pages 161-168, June.
  4. 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.

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