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Risk Aversion, Liability Rules, and Safety

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Author Info
Joshua Graff Zivin
Richard Just
David Zilberman

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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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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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Handle: RePEc:nbr:nberwo:9678

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D8 - Microeconomics - - Information, Knowledge, and Uncertainty
K0 - Law and Economics - - General

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  1. Privileggi, Fabio & Marchese, Carla & Cassone, Alberto, 2001. "Agent's liability versus principal's liability when attitudes toward risk differ," International Review of Law and Economics, Elsevier, vol. 21(2), pages 181-195, June. [Downloadable!] (restricted)
  2. Joseph Farrell., 1987. "Information and the Coase Theorem," Economics Working Papers 8747, University of California at Berkeley.
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  3. Shavell, Steven, 1997. "The optimal level of corporate liability given the limited ability of corporations to penalize their employees," International Review of Law and Economics, Elsevier, vol. 17(2), pages 203-213, June. [Downloadable!] (restricted)
  4. Graff Zivin, Joshua & Small, Arthur A., 2003. "Risk sharing in Coasean contracts," Journal of Environmental Economics and Management, Elsevier, vol. 45(2, Supple), pages 394-415, March. [Downloadable!] (restricted)
  5. DeSerpa, Allan C., 1994. "Pigou and Coase : A mathematical reconciliation," Journal of Public Economics, Elsevier, vol. 54(2), pages 267-286, June. [Downloadable!] (restricted)
  6. Mishan, E J, 1971. "The Postwar Literature on Externalities: An Interpretative Essay," Journal of Economic Literature, American Economic Association, vol. 9(1), pages 1-28, March. [Downloadable!] (restricted)
  7. A. Mitchell Polinsky, 1980. "Strict Liability versus Negligence in a Market Setting," NBER Working Papers 0420, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  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. Spence, A Michael, 1977. "Consumer Misperceptions, Product Failure and Producer Liability," Review of Economic Studies, Blackwell Publishing, vol. 44(3), pages 561-72, October. [Downloadable!] (restricted)
  10. Just, Richard E & Zilberman, David, 1979. "Asymmetry of Taxes and Subsidies in Regulating Stochastic Mishap," The Quarterly Journal of Economics, MIT Press, vol. 93(1), pages 139-48, February. [Downloadable!] (restricted)
  11. Lazear, Edward P & Moore, Robert L, 1984. "Incentives, Productivity, and Labor Contracts," The Quarterly Journal of Economics, MIT Press, vol. 99(2), pages 275-96, May. [Downloadable!] (restricted)
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  1. Langlais, Eric, 2006. "Criminals and risk attitude," MPRA Paper 1149, University Library of Munich, Germany, revised 15 Sep 2006. [Downloadable!]
  2. Darri-Mattiacci, Giuseppe & Langlais, Eric, 2008. "Social wealth and optimal care," MPRA Paper 9418, University Library of Munich, Germany. [Downloadable!]
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