Liability Rules and Hazardous Materials Transportation

This paper studies the bargaining between a shipper and potential carriers during the selection of a specific carrier and the resulting size of a transfer payment, when carriers' accident probabilities are proprietary information (i.e., the probability of accident and the safety investment of a particular carrier are not available to the shipper nor to other carriers). Optimal auction mechanism designs are used to analyze the bargaining process. When there is no likelihood of carrier bankruptcy, the shipper benefits more from joint liability with the carrier than under a rule of strict liability of the carrier. Carriers, on the other hand, free from the potential of bankruptcy, stand to benefit more from strict liability. Under conditions where carrier bankruptcy could result from an accident, the shipper benefits more from strict liability than joint liability, and the reverse is true for carriers. A liability rule which is socially desirable depends upon the safety investments by carriers, carrier asset levels and the level of (common) knowledge of the accident probability of individual carriers.