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Liability Insurance under the Negligence Rule

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Author Info
Marie-Cécile Fagart
Claude Fluet

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

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Find related papers by JEL classification:
D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information
K41 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior - - - Litigation Process
K42 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior - - - Illegal Behavior and the Enforcement of Law

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    Other versions:
  2. Hart, Oliver & Moore, John, 1999. "Foundations of Incomplete Contracts," Review of Economic Studies, Blackwell Publishing, vol. 66(1), pages 115-38, January. [Downloadable!] (restricted)
    Other versions:
  3. Dominique Demougin & Claude Fluet, 1998. "Ranking of Information Systems in Agency Models: An Integral Condition," Cahiers de recherche CREFE / CREFE Working Papers 70, CREFE, Université du Québec à Montréal. [Downloadable!]
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  7. Claude Fluet, 2006. "Liability Rules under Evidentiary Uncertainty," Cahiers de recherche 0606, CIRPEE. [Downloadable!]
  8. Steven Shavell, 2003. "Economic Analysis of Accident Law," NBER Working Papers 9694, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  9. Kessler, Daniel & McClellan, Mark, 1996. "Do Doctors Practice Defensive Medicine?," The Quarterly Journal of Economics, MIT Press, vol. 111(2), pages 353-90, May. [Downloadable!] (restricted)
  10. Menezes, C & Geiss, C & Tressler, J, 1980. "Increasing Downside Risk," American Economic Review, American Economic Association, vol. 70(5), pages 921-32, December. [Downloadable!] (restricted)
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  12. Steven Shavell, 1982. "On Liability and Insurance," Bell Journal of Economics, The RAND Corporation, vol. 13(1), pages 120-132, Spring. [Downloadable!] (restricted)
  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. [Downloadable!] (restricted)
  14. Schweizer, Urs, 2005. "Law and Economics of Obligations," International Review of Law and Economics, Elsevier, vol. 25(2), pages 209-228, June. [Downloadable!] (restricted)
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  16. Bharat Sarath, 1991. "Uncertain Litigation and Liability Insurance," RAND Journal of Economics, The RAND Corporation, vol. 22(2), pages 218-231, Summer. [Downloadable!] (restricted)
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