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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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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/

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Keywords: Accidents; limited liability and negligence rule;

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  1. Innes, Robert, 1999. "Optimal liability with stochastic harms, judgement-proof injurers, and asymmetric information1," International Review of Law and Economics, Elsevier, vol. 19(2), pages 181-203, June.
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  7. Lewis, Tracy R. & Sappington, David E. M., 1999. "Using decoupling and deep pockets to mitigate judgment-proof problems1," International Review of Law and Economics, Elsevier, vol. 19(2), pages 275-293, June.
  8. Tracy R. Lewis & David E. M. Sappington, 2001. "How Liable Should a Lender Be? The Case of Judgment-Proof Firms and Environmental Risk: Comment," American Economic Review, American Economic Association, vol. 91(3), pages 724-730, June.
  9. Miceli, Thomas J & Segerson, Kathleen, 1995. "Defining Efficient Care: The Role of Income Distribution," The Journal of Legal Studies, University of Chicago Press, vol. 24(1), pages 189-208, January.
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  12. Dari-Mattiacci, Giuseppe & De Geest, Gerrit, 2006. "When will judgment proof injurers take too much precaution?," International Review of Law and Economics, Elsevier, vol. 26(3), pages 336-354, September.
  13. Dieter Balkenborg, 2001. "How Liable Should a Lender Be? The Case of Judgment-Proof Firms and Environmental Risk: Comment," American Economic Review, American Economic Association, vol. 91(3), pages 731-738, June.
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  16. Miceli, Thomas J. & Segerson, Kathleen, 2003. "A note on optimal care by wealth-constrained injurers," International Review of Law and Economics, Elsevier, vol. 23(3), pages 273-284, September.
  17. Feess, Eberhard & Hege, Ulrich, 2003. "Safety monitoring, capital structure, and "financial responsibility"," International Review of Law and Economics, Elsevier, vol. 23(3), pages 323-339, September.
  18. Jost, Peter-J., 1996. "Limited liability and the requirement to purchase insurance," International Review of Law and Economics, Elsevier, vol. 16(2), pages 259-276, June.
  19. Eberhard Feess, 1999. "Lender Liability for Environmental Harm: An Argument Against Negligence Based Rules," European Journal of Law and Economics, Springer, vol. 8(3), pages 231-250, November.
  20. Steven Shavell, 2002. "Minimum Asset Requirements," NBER Working Papers 9335, National Bureau of Economic Research, Inc.
  21. Shavell, Steven, 1981. "A Note on Efficiency vs. Distributional Equity in Legal Rulemaking: Should Distributional Equity Matter Given Optimal Income Taxation?," American Economic Review, American Economic Association, vol. 71(2), pages 414-18, May.
  22. 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.
  23. Steven Shavell, 2000. "On the Social Function and the Regulation of Liability Insurance," The Geneva Papers on Risk and Insurance - Issues and Practice, Palgrave Macmillan, vol. 25(2), pages 166-179, April.
  24. Boyd, James & Ingberman, Daniel E, 1994. "Noncompensatory Damages and Potential Insolvency," The Journal of Legal Studies, University of Chicago Press, vol. 23(2), pages 895-910, June.
  25. Boyd, James & Ingberman, Daniel E, 1997. "The Search for Deep Pockets: Is "Extended Liability" Expensive Liability?," Journal of Law, Economics and Organization, Oxford University Press, vol. 13(1), pages 232-58, April.
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Cited by:
  1. Dari-Mattiacci, Giuseppe & De Geest, Gerrit, 2006. "When will judgment proof injurers take too much precaution?," International Review of Law and Economics, Elsevier, vol. 26(3), pages 336-354, September.
  2. 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.
  3. 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.

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