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Liability Insurance under the Negligence Rule

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  • Marie-Cécile Fagart
  • Claude Fluet

Abstract

We analyze the efficiency properties of the negligence rule with liability insurance, when the tort-feasor's behavior is imperfectly observable both by the insurer and the court. Efficiency is shown to depend on the extent to which the evidence is informative, on the evidentiary standard for finding negligence, and on whether insurance contracts can condition directly on the same evidence as used by courts to assess behavior. When evidence is not directly contractible, the negligence rule with compensatory damages is generally inefficient and can be improved by decoupling liability from the harm suffered by the victim.

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Bibliographic Info

Paper provided by CIRPEE in its series Cahiers de recherche with number 0730.

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Date of creation: 2007
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Handle: RePEc:lvl:lacicr:0730

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Keywords: Negligence; liability insurance; evidentiary standard; moral hazard; judicial error; decoupling; prudence;

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References

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  1. Daniel P. Kessler & Mark McClellan, 1996. "Do Doctors Practice Defensive Medicine?," NBER Working Papers 5466, National Bureau of Economic Research, Inc.
  2. Oliver Hart & John Moore, 1998. "Foundations of Incomplete Contracts," NBER Working Papers 6726, National Bureau of Economic Research, Inc.
  3. Miles S. Kimball, 1989. "Precautionary Saving in the Small and in the Large," NBER Working Papers 2848, National Bureau of Economic Research, Inc.
  4. Schweizer, Urs, 2005. "Law and Economics of Obligations," International Review of Law and Economics, Elsevier, Elsevier, vol. 25(2), pages 209-228, June.
  5. Rogerson, William P, 1985. "The First-Order Approach to Principal-Agent Problems," Econometrica, Econometric Society, Econometric Society, vol. 53(6), pages 1357-67, November.
  6. Dominique Demougin & Claude Fluet, 1998. "Ranking of Information Systems in Agency Models: An Integral Condition," Cahiers de recherche CREFE / CREFE Working Papers, CREFE, Université du Québec à Montréal 70, CREFE, Université du Québec à Montréal.
  7. Kessler, Daniel & McClellan, Mark, 1996. "Do Doctors Practice Defensive Medicine?," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 111(2), pages 353-90, May.
  8. Aaron S. Edlin., 1993. "Efficient Standards of Due Care: Should Courts Find More Parties Negligent Under Comparative Negligence?," Economics Working Papers, University of California at Berkeley 93-218, University of California at Berkeley.
  9. Menezes, C & Geiss, C & Tressler, J, 1980. "Increasing Downside Risk," American Economic Review, American Economic Association, vol. 70(5), pages 921-32, December.
  10. Marie-Cécile Fagart & Bernard Sinclair-Desgagné, 2007. "Ranking Contingent Monitoring Systems," Management Science, INFORMS, INFORMS, vol. 53(9), pages 1501-1509, September.
  11. Bharat Sarath, 1991. "Uncertain Litigation and Liability Insurance," RAND Journal of Economics, The RAND Corporation, vol. 22(2), pages 218-231, Summer.
  12. Steven Shavell, 2003. "Economic Analysis of Accident Law," NBER Working Papers 9483, National Bureau of Economic Research, Inc.
  13. Kim, Son Ku, 1995. "Efficiency of an Information System in an Agency Model," Econometrica, Econometric Society, Econometric Society, vol. 63(1), pages 89-102, January.
  14. 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.
  15. Claude Fluet, 2006. "Liability Rules under Evidentiary Uncertainty," Cahiers de recherche, CIRPEE 0606, CIRPEE.
  16. Lewis, Tracy R. & Sappington, David E. M., 1999. "Using decoupling and deep pockets to mitigate judgment-proof problems1," International Review of Law and Economics, Elsevier, Elsevier, vol. 19(2), pages 275-293, June.
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Cited by:
  1. Dionne, Georges & Michaud, Pierre-Carl & Pinquet, Jean, 2013. "A review of recent theoretical and empirical analyses of asymmetric information in road safety and automobile insurance," Research in Transportation Economics, Elsevier, vol. 43(1), pages 85-97.
  2. BOYER, Marcel & PORRINI, Donatella, 2010. "Optimal Liability Sharing and Court Errors : An Exploratory Analysis," Cahiers de recherche, Centre interuniversitaire de recherche en économie quantitative, CIREQ 05-2010, Centre interuniversitaire de recherche en économie quantitative, CIREQ.
  3. Donald J., Wright, 2011. "Medical malpractice and physician liability under a negligence rule," International Review of Law and Economics, Elsevier, Elsevier, vol. 31(3), pages 205-211, September.

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