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Risk Aversion, Liability Rules, and Safety

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  • Joshua Graff Zivin
  • Richard Just
  • David Zilberman

Abstract

This paper investigates the performance of liability rules in two-party stochastic externality problems where negotiations are feasible and side payments are based on the realized level of externalities. Results show that an increase in polluter liability does not necessarily increase safety or efficiency in cases where the polluter is risk neutral. Complete polluter liability is found to yield Pareto optimality. When either party is risk averse, an increase in polluter liability may sometimes reduce safety and efficiency. If the polluter is risk neutral and the victim is risk averse, Pareto optimality is only achieved by assigning full liability on the polluter, i.e. giving the victim complete property rights to a clean environment. If the polluter is risk averse and the victim is risk neutral, no level of polluter liability is optimal. In this case, optimality can only be achieved through a contract on abatement activities, such that the risk-averse polluter receives a guaranteed payment regardless of the stochastic outcome.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 9678.

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Date of creation: May 2003
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Publication status: published as Zivin, Joshua Graff & Just, Richard E. & Zilberman, David, 2005. "Risk Aversion, Liability Rules, and Safety," International Review of Law and Economics, Elsevier, vol. 25(4), pages 604-623, December.
Handle: RePEc:nbr:nberwo:9678

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Cited by:
  1. Darri-Mattiacci, Giuseppe & Langlais, Eric, 2008. "Social wealth and optimal care," MPRA Paper 9418, University Library of Munich, Germany.
  2. Éric Langlais, 2010. "Les criminels aiment-ils le risque ?," Revue économique, Presses de Sciences-Po, vol. 0(2), pages 263-280.
  3. Langlais, Eric, 2010. "Safety and the Allocation of Costs in Large Accidents," MPRA Paper 25710, University Library of Munich, Germany.
  4. Langlais, Eric, 2006. "Criminals and risk attitude," MPRA Paper 1149, University Library of Munich, Germany, revised 15 Sep 2006.

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