Optimal Negligence Rule under Limited Liability

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Optimal Negligence Rule under Limited Liability

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Juan José Ganuza ()
Fernando Gómez

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Juan-José Ganuza

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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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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Find related papers by JEL classification:
K13 - Law and Economics - - Basic Areas of Law - - - Tort Law and Product Liability
K23 - Law and Economics - - Regulation and Business Law - - - Regulated Industries and Administrative Law
L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies

This paper has been announced in the following NEP Reports:

NEP-ALL-2004-12-12 (All new papers)
NEP-LAW-2004-12-12 (Law & Economics)

References listed on IDEAS
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Other versions:
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Other versions:
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Other versions:
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