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Correlated Accidents

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  • Luigi Alberto Franzoni

Abstract

This article investigates cases in which harms are statistically correlated. When parties are risk averse, correlation plays an important role in the choice between liability rules. Specifically, positively correlated harms favor a liability rule that spreads the risk over a multitude of parties, as in the negligence rule. Negatively correlated harms favor a liability rule that pools risks together, as in strict liability. The same applies when parties can purchase costly insurance (first party or third party).This policy recommendation is in line with current products liability law, which places design defects and warning failures under a de facto negligence regime.

Suggested Citation

  • Luigi Alberto Franzoni, 2016. "Correlated Accidents," American Law and Economics Review, Oxford University Press, vol. 18(2), pages 358-384.
  • Handle: RePEc:oup:amlawe:v:18:y:2016:i:2:p:358-384.
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    File URL: http://hdl.handle.net/10.1093/aler/ahw014
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    References listed on IDEAS

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    1. Levon Barseghyan & Francesca Molinari & Ted O'Donoghue & Joshua C. Teitelbaum, 2013. "The Nature of Risk Preferences: Evidence from Insurance Choices," American Economic Review, American Economic Association, vol. 103(6), pages 2499-2529, October.
    2. Alma Cohen & Liran Einav, 2007. "Estimating Risk Preferences from Deductible Choice," American Economic Review, American Economic Association, vol. 97(3), pages 745-788, June.
    3. Steven Shavell, 1982. "On Liability and Insurance," Bell Journal of Economics, The RAND Corporation, vol. 13(1), pages 120-132, Spring.
    4. Abraham L. Wickelgren, 2006. "The Inefficiency of Contractually-Based Liability with Rational Consumers," Journal of Law, Economics, and Organization, Oxford University Press, vol. 22(1), pages 168-183, April.
    5. L. A. Franzoni, 2016. "Optimal liability design under risk and ambiguity," Working Papers wp1048, Dipartimento Scienze Economiche, Universita' di Bologna.
    6. Froot, Kenneth A & Scharfstein, David S & Stein, Jeremy C, 1993. " Risk Management: Coordinating Corporate Investment and Financing Policies," Journal of Finance, American Finance Association, vol. 48(5), pages 1629-1658, December.
    7. Justin Sydnor, 2010. "(Over)insuring Modest Risks," American Economic Journal: Applied Economics, American Economic Association, vol. 2(4), pages 177-199, October.
    8. Steven Shavell, 2014. "Risk Aversion and the Desirability of Attenuated Legal Change," American Law and Economics Review, Oxford University Press, vol. 16(2), pages 366-402.
    9. Nell, Martin & Richter, Andreas, 2003. "The design of liability rules for highly risky activities--Is strict liability superior when risk allocation matters?," International Review of Law and Economics, Elsevier, vol. 23(1), pages 31-47, March.
    10. Steven Shavell, 2014. "Risk Aversion and the Desirability of Attenuated Legal Change," NBER Working Papers 19879, National Bureau of Economic Research, Inc.
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    More about this item

    JEL classification:

    • K13 - Law and Economics - - Basic Areas of Law - - - Tort Law and Product Liability; Forensic Economics

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