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Realistic Standards: Optimal Negligence with Limited Liability

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  • Juan José Ganuza
  • Fernando Gómez
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    Abstract

    We study the standard economic model of unilateral accidents under the assumption that the injurers have limited assets. We identify a second-best optimal rule that selects as due care the minimum of first-best care and a level of care that takes into account the wealth of the injurer. We show that such a rule in fact maximizes the precautionary effort by a potential injurer. The idea is counterintuitive: being softer on an injurer, in terms of the required level of care, actually improves the incentives when he or she is potentially insolvent. We extend the basic result to an entire population of potentially insolvent injurers and find that the optimal general standards of care do depend on wealth and the distribution of income. We also show that, under certain conditions, wealthier populations should be subject to higher general standards of care in the case of accidents. (c) 2008 by The University of Chicago. All rights reserved..

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    File URL: http://www.journals.uchicago.edu/doi/pdf/10.1086/586718
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    Bibliographic Info

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

    Volume (Year): 37 (2008)
    Issue (Month): 2 (06)
    Pages: 577-594

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    Handle: RePEc:ucp:jlstud:v:37:y:2008:i:2:p:577-594

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    Web page: http://www.journals.uchicago.edu/JLS/

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    Cited by:
    1. Stremitzer, Alexander & Tabbach, Avraham, 2009. "Insolvency and Biased Standards - The Case for Proportional Liability," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 289, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
    2. Friehe, Tim, 2009. "Precaution v. avoidance: A comparison of liability rules," Economics Letters, Elsevier, vol. 105(3), pages 214-216, December.
    3. Baniak Andrzej & Grajzl Peter, 2011. "Interjurisdictional Linkages and the Scope for Interventionist Legal Harmonization," Review of Law & Economics, De Gruyter, vol. 7(2), pages 405-434, December.
    4. Loeper, Antoine, 2011. "Coordination in heterogeneous federal systems," Journal of Public Economics, Elsevier, vol. 95(7), pages 900-912.
    5. Darri-Mattiacci, Giuseppe & Langlais, Eric, 2008. "Social wealth and optimal care," MPRA Paper 9418, University Library of Munich, Germany.

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