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Vicarious Liability and the Intensity Principle

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  • Schweizer, Urs
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    Abstract

    The present paper provides an economic analysis of vicarious liability that takes information rents and monitoring costs to be borne by the principal explicitly into account. In the presence of information rents or if the principal is wealth constrained herself, vicarious liability need not generate efficient precaution incentives. Rather, precaution incentives turn out to depend on the exact quantum of damages specified by courts. I shall compare incentives under three damages regimes: strict liability, the traditional negligence rule, and proportional liability. To do so, I make use of the intensity principle that allows to rank damages regimes based on the monotonicity of differences of the principal's expected payof f as a function of induced precaution.

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    File URL: http://epub.ub.uni-muenchen.de/13190/1/364.pdf
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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 364.

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    Date of creation: Oct 2011
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    Handle: RePEc:trf:wpaper:364

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    Related research

    Keywords: vicarious liability; precaution incentives; judgement-proof principals and agents; discrepancy between private and social costs;

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    1. T. Randolph Beard, 1990. "Bankruptcy and Care Choice," RAND Journal of Economics, The RAND Corporation, vol. 21(4), pages 626-634, Winter.
    2. Stremitzer, Alexander & Tabbach, Avraham, 2009. "Insolvency and Biased Standards--The Case for Proportional Liability," Working Papers 75, Yale University, Department of Economics.
    3. Dominique Demougin & Claude Fluet, 1998. "A Further Justification for the Negligence Rule," Cahiers de recherche du Département des sciences économiques, UQAM 9801, Université du Québec à Montréal, Département des sciences économiques.
    4. 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.
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