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Insolvency and Biased Standards - The Case for Proportional Liability

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  • Stremitzer, Alexander
  • Tabbach, Avraham

Abstract

We analyze liability rules in a setting where injurers are potentially insolvent and where negligence standards may deviate from the socially optimal level. We show that proportional liability, which sets the measure of damages equal to the harm multiplied by the probability that it was caused by an injurer’s negligence, is preferable to other existing negligence-based rules. Moreover, proportional liability outperforms strict liability if the standard of due care is not set too low. Our analysis also suggests that courts should rely on statistical evidence and bar individualized causal claims that link the harm suffered by a plaintiff to the actions of the defendant. Finally, we provide a result which might be useful to regulators when calculating minimum capital requirements or minimum mandatory insurance for different industries.

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Bibliographic Info

Paper provided by Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich in its series Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems with number 289.

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Date of creation: Dec 2009
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Handle: RePEc:trf:wpaper:289

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Keywords: judgment proof problem; uncertain causation; court error and misperception; proportional liability; disgorgement;

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References

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  1. Camerer, Colin & Loewenstein, George & Weber, Martin, 1989. "The Curse of Knowledge in Economic Settings: An Experimental Analysis," Journal of Political Economy, University of Chicago Press, vol. 97(5), pages 1232-54, October.
  2. Robert D. Cooter, 1991. "Economic Theories of Legal Liability," Journal of Economic Perspectives, American Economic Association, vol. 5(3), pages 11-30, Summer.
  3. Kaplow, Louis, 1994. "The Value of Accuracy in Adjudication: An Economic Analysis," The Journal of Legal Studies, University of Chicago Press, vol. 23(1), pages 307-401, January.
  4. Landes, William M, 1990. "Insolvency and Joint Torts: A Comment," The Journal of Legal Studies, University of Chicago Press, vol. 19(2), pages 679-89, June.
  5. Kornhauser, Lewis A & Revesz, Richard L, 1990. "Apportioning Damages among Potentially Insolvent Actors," The Journal of Legal Studies, University of Chicago Press, vol. 19(2), pages 617-51, June.
  6. Tabbach Avraham D., 2008. "Causation and Incentives to Choose Levels of Care and Activity Under the Negligence Rule," Review of Law & Economics, De Gruyter, vol. 4(1), pages 133-152, May.
  7. Shmuel Leshem & Geoffrey P. Miller, 2009. "All-or-Nothing versus Proportionate Damages," The Journal of Legal Studies, University of Chicago Press, vol. 38(2), pages 345-382, 06.
  8. Kahan, Marcel, 1989. "Causation and Incentives to Take Care under the Negligence Rule," The Journal of Legal Studies, University of Chicago Press, vol. 18(2), pages 427-47, June.
  9. Juan José Ganuza & Fernando Gómez, 2008. "Realistic Standards: Optimal Negligence with Limited Liability," The Journal of Legal Studies, University of Chicago Press, vol. 37(2), pages 577-594, 06.
  10. Steven Shavell, 1983. "Uncertainty Over Causation and the Determination of Civil Liability," NBER Working Papers 1219, National Bureau of Economic Research, Inc.
  11. Craswell, Richard & Calfee, John E, 1986. "Deterrence and Uncertain Legal Standards," Journal of Law, Economics and Organization, Oxford University Press, vol. 2(2), pages 279-303, Fall.
  12. Schweizer, Urs, 2009. "Legal damages for losses of chances," International Review of Law and Economics, Elsevier, vol. 29(2), pages 153-160, June.
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Cited by:
  1. Schweizer, Urs, 2011. "Vicarious Liability and the Intensity Principle," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 364, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.

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