Equilibria under Negligence Liability: How the Standard Claims Fall Apart

In an important and seminal contribution Shavell (1980) extended the scope of economic analysis of liability rules by providing a model that allows for the care and activity level choices by the parties. Subsequent works have extended the model to predict outcomes under various liability rules and also to compare their efficiency properties. In this paper, we dispute the mainstream claims about the existence and efficiency of equilibria under liability rules. Contrary to the claims in much of the existing literature, we use the standard model to show that none of the standard negligence based liability rules induces an equilibrium. Moreover, the rules of strict liability for injurer, and no-liability for injurer, which place all losses on just one party, are significantly more efficient than the rules that require sharing of accident loss between the parties as well as the standard negligence rules. Finally, we show that the standard models are inherently flawed. The social optimization problems induced by these models generally do not have a solution, or may have multiple solutions none of which is discoverable by the first order conditions.