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Soft Regulators, Though Judges

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Author Info
Gerrit de Geest ()
Giuseppe Dari-Mattiacci ()
Abstract

Judges have a tendency to be more demanding than regulators. In the United States, a majority of the courts has adopted the rule that the unexcused violation of a statutory standard is negligence per se. However, the converse does not hold: compliance with regulation does not relieve the injurer of tort liability. In most European legal systems, the outcome is similar. We use a framework in which, on the one hand, the effects of tort law are undermined by insolvency and evidence problems and, on the other hand, regulation is expensive in terms of monitoring and information gathering. We show that a regulatory standard set below the socially optimal level of care can be sufficient to remove the shortcomings of tort law. In essence, this is because the injurer's cost function may have two local minima that make only major deviations from the socially desirable level of precaution advantageous for the injurer, but not minor violations. This may occur when precaution also or only reduces the magnitude of the harm and under liability for negligence. Thus, minimum regulation can completely restore optimal liability incentives. Conversely, liability reduces the cost of enforcing regulation in two ways: first, enforcing minimum regulation rather than a standard set at the socially optimal level is cheaper because it requires lower monitoring levels; second, tort liability already provides a part of the sanction for sub-optimal behavior, thus allowing for a further reduction in monitoring. Moreover, we show that minimum regulation does not need to be set at a very precise level. On the contrary, any level within a certain range is socially optimal. This allows regulators to further curb their cost by saving on information gathering. We show that an imperfectly working tort system can be fully corrected by minimum regulation in a variety of circumstances (for instance, even if the injurer is unable to compensate for the harm at the optimal level of precaution, and even if the rule in force is strict liability or a cause-in-fact variant of negligence).

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Paper provided by Utrecht School of Economics in its series Working Papers with number 05-06.

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Length: 68 pages
Date of creation: Mar 2005
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Handle: RePEc:use:tkiwps:0506

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Related research
Keywords: insolvency; judgment proof problem; disappearing defendant; bankruptcy; regulation;

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Find related papers by JEL classification:
K13 - Law and Economics - - Basic Areas of Law - - - Tort Law and Product Liability
K32 - Law and Economics - - Other Substantive Areas of Law - - - Environmental, Health, and Safety Law

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  3. Trebilcock, Michael & Winter, Ralph A., 1997. "The economics of nuclear accident law," International Review of Law and Economics, Elsevier, vol. 17(2), pages 215-243, June. [Downloadable!] (restricted)
  4. Kahan, Marcel, 1989. "Causation and Incentives to Take Care under the Negligence Rule," Journal of Legal Studies, University of Chicago Press, vol. 18(2), pages 427-47, June.
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  6. 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. [Downloadable!] (restricted)
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  7. Richard MacMinn, 2002. "On the Judgment Proof Problem," The Geneva Risk and Insurance Review, Palgrave Macmillan Journals, vol. 27(2), pages 143-152, December. [Downloadable!] (restricted)
  8. Ehrlich, Isaac & Becker, Gary S, 1972. "Market Insurance, Self-Insurance, and Self-Protection," Journal of Political Economy, University of Chicago Press, vol. 80(4), pages 623-48, July-Aug.. [Downloadable!] (restricted)
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  12. T. Randolph Beard, 1990. "Bankruptcy and Care Choice," RAND Journal of Economics, The RAND Corporation, vol. 21(4), pages 626-634, Winter. [Downloadable!] (restricted)
  13. Innes, Robert, 2004. "Enforcement costs, optimal sanctions, and the choice between ex-post liability and ex-ante regulation," International Review of Law and Economics, Elsevier, vol. 24(1), pages 29-48, March. [Downloadable!] (restricted)
  14. Steven Shavell, 1984. "A Model of the Optimal Use of Liability and Safety Regulation," RAND Journal of Economics, The RAND Corporation, vol. 15(2), pages 271-280, Summer. [Downloadable!] (restricted)
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  16. Shavell, S., 1986. "The judgment proof problem," International Review of Law and Economics, Elsevier, vol. 6(1), pages 45-58, June. [Downloadable!] (restricted)
  17. Giuseppe Dari-Mattiacci & Gerrit De Geest, 2005. "Judgment Proofness under Four Different Precaution Technologies," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 161(1), pages 38-, March. [Downloadable!] (restricted)
  18. Schmitz, Patrick W., 2000. "On the Joint Use of Liability and Safety Regulation," MPRA Paper 12536, University Library of Munich, Germany. [Downloadable!]
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  19. Kolstad, Charles D & Ulen, Thomas S & Johnson, Gary V, 1990. "Ex Post Liability for Harm vs. Ex Ante Safety Regulation: Substitutes or Complements?," American Economic Review, American Economic Association, vol. 80(4), pages 888-901, September. [Downloadable!] (restricted)
  20. Boyd, James & Ingberman, Daniel E, 1994. "Noncompensatory Damages and Potential Insolvency," Journal of Legal Studies, University of Chicago Press, vol. 23(2), pages 895-910, June.
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  22. Arlen, Jennifer H., 1990. "Re-examining liability rules when injurers as well as victims suffer losses," International Review of Law and Economics, Elsevier, vol. 10(3), pages 233-239, December. [Downloadable!] (restricted)
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