Buying the Right to Harm: The Economics of Buyouts
AbstractMany injurers now offer to buy out victims' property to reduce harm. This pa- per examines the e¢ ciency of buyouts negotiated in the shadow of regulation and liability rules which require injurers to take e¢ cient precautions. It shows that if the social bene?t from precautions is increasing with victims?expected harm, buyouts reduce social welfare. Because buyouts allow injurers to take fewer precautions, a buyout of one victim produces a negative externality for the remaining victims. The injurer can thus exploit victims through a "divide-and-conquer" strategy: making simultaneous, discriminatory take-it-or-leave-it buyout offers. The injurer's profit from buyouts is greater if o¤ers are sequential. Perhaps most surprisingly, buyouts reduce social welfare and victims' joint profits even if victims make simultaneous or sequential take-it-or-leave-it buyout demands to the injurer.
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Bibliographic InfoPaper provided by Aix-Marseille Université, CERGAM in its series CAE Working Papers with number 93.
Length: 37 pages
Date of creation: May 2011
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Cost-benefit standards; divide and conquer; harmful externalities;
Find related papers by JEL classification:
- K13 - Law and Economics - - Basic Areas of Law - - - Tort Law and Product Liability
- C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
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