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Optimal negligence rule under limited liability

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Abstract

We study the standard economic model of unilateral accidents, in its simplest form, assuming that the injurers have limited assets.We identify a second-best optimal rule that selects as due care the minimum of first-best care, and a level of care that takes into account the wealth of the injurer. We show that such a rule in fact maximizes the precautionary effort by a potential injurer. The idea is counterintuitive: Being softer on an injurer, in terms of the required level of care, actually improves the incentives to take care when he is potentially insolvent. We extend the basic result to an entire population of potentially insolvent injurers, and find that the optimal general standards of care do depend on wealth, and distribution of income. We also show the conditions for the result that higher income levels in a given society call for higher levels of care for accidents.

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File URL: http://www.econ.upf.edu/docs/papers/downloads/759.pdf
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Bibliographic Info

Paper provided by Department of Economics and Business, Universitat Pompeu Fabra in its series Economics Working Papers with number 759.

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Date of creation: Mar 2003
Date of revision: May 2004
Handle: RePEc:upf:upfgen:759

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Web page: http://www.econ.upf.edu/

Related research

Keywords: Accidents; limited liability and negligence rule;

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References

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  24. Juan José Ganuza & Fernando Gómez, 2002. "Caution, children crossing: Heterogeneity of victim's cost of care and negligence rule," Economics Working Papers 666, Department of Economics and Business, Universitat Pompeu Fabra.
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Citations

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Cited by:
  1. Giuseppe Dari Mattiacci & Gerrit De Geest, . "When Will Judgment Proof Injurers Take Too Much Precaution?," German Working Papers in Law and Economics 2002-1-1051, Berkeley Electronic Press.
  2. Jonathan Yoder, 2008. "Liability, Regulation, and Endogenous Risk: The Incidence and Severity of Escaped Prescribed Fires in the United States," Journal of Law and Economics, University of Chicago Press, vol. 51(2), pages 297-325, 05.
  3. Nuno Garoupa, 2009. "Least-Cost Avoidance: The Tragedy of Common Safety," Journal of Law, Economics and Organization, Oxford University Press, vol. 25(1), pages 235-261, May.

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