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On the Optimal Structure of Liability Laws

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  • Jerry Green

Abstract

We consider the control of two-party accidents through the use of liability rules that assign damages according to whether or not predetermined standards for care have been met. Particular emphasis is given to how the differential in the costs of accident avoidance activities affects the optimal legal rule and optimal care standards. It is shown that when the costs are close to uniform across individuals, an approximation to the first-best can be obtained. Moreover, alternative legal rules are equally efficient in achieving this situation. When the differential widens, legal rules will differ in their ability to reach the second-best. In contrast to previous models of liability law, it is shown that the courts must play an active adjudicatory role in the optimal solution.

Suggested Citation

  • Jerry Green, 1976. "On the Optimal Structure of Liability Laws," Bell Journal of Economics, The RAND Corporation, vol. 7(2), pages 553-574, Autumn.
    • Handle: RePEc:rje:bellje:v:7:y:1976:i:autumn:p:553-574
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    Cited by:

    1. Jens Gudmundsson & Jens Leth Hougaard & Chiu Yu Ko, 2022. "Sharing sequentially triggered losses: Automatic conflict resolution through smart contracts," IFRO Working Paper 2020/05, University of Copenhagen, Department of Food and Resource Economics.
    2. Edward P. Lazear, 1999. "Culture and Language," Journal of Political Economy, University of Chicago Press, vol. 107(S6), pages 95-126, December.
    3. Langlais, Eric, 2010. "Safety and the Allocation of Costs in Large Accidents," MPRA Paper 25710, University Library of Munich, Germany.
    4. Kai-Lung Hui & Ping Fan Ke & Yuxi Yao & Wei T. Yue, 2019. "Bilateral Liability-Based Contracts in Information Security Outsourcing," Information Systems Research, INFORMS, vol. 30(2), pages 411-429, June.
    5. Laszlo Goerke, 2001. "Accident Law: An Excessive Standard May Be Efficient," CESifo Working Paper Series 625, CESifo.
    6. Palumbo, Giuliana & Iossa, Elisabetta, 2002. "Lender liability in the Consumer Credit Market," FGV EPGE Economics Working Papers (Ensaios Economicos da EPGE) 451, EPGE Brazilian School of Economics and Finance - FGV EPGE (Brazil).
    7. Edward P. Lazear, 1986. "Incentive Contracts," NBER Working Papers 1917, National Bureau of Economic Research, Inc.
    8. Edlin, Aaron S. & Karaca-Mandic, Pinar, 2005. "The Accident Externality from Driving," Department of Economics, Working Paper Series qt2h23t6rt, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
    9. Goerke Laszlo, 2002. "Accident Law: Efficiency May Require an Inefficient Standard," German Economic Review, De Gruyter, vol. 3(1), pages 43-51, February.
    10. Giuseppe Dari-Mattiacci & Gerrit De Geest, 2005. "The Filtering Effect of Sharing Rules," The Journal of Legal Studies, University of Chicago Press, vol. 34(1), pages 207-237, January.
    11. Steven Shavell, 2019. "On the Redesign of Accident Liability for the World of Autonomous Vehicles," NBER Working Papers 26220, National Bureau of Economic Research, Inc.
    12. Ram Singh, 2001. "Efficient Liability Rules When Courts Make Errors in Estimation of the Harm : Complete Characterization," Working papers 99, Centre for Development Economics, Delhi School of Economics.
    13. Siebert, Horst, 1989. "Liability issues in pollution control," Kiel Working Papers 350, Kiel Institute for the World Economy (IfW Kiel).
    14. Yannis Bakos & Chrysanthos Dellarocas, 2011. "Cooperation Without Enforcement? A Comparative Analysis of Litigation and Online Reputation as Quality Assurance Mechanisms," Management Science, INFORMS, vol. 57(11), pages 1944-1962, November.
    15. Steven Shavell, 2005. "Liability for Accidents," NBER Working Papers 11781, National Bureau of Economic Research, Inc.
    16. Edlin, Aaron S. & Karaca-Mandic, Pinar, 2007. "The Accident Externality from Driving," Berkeley Olin Program in Law & Economics, Working Paper Series qt6179d3nw, Berkeley Olin Program in Law & Economics.
    17. Jens Gudmundsson & Jens Leth Hougaard & Chiu Yu Ko, 2020. "Sharing sequentially triggered losses," IFRO Working Paper 2020/05, University of Copenhagen, Department of Food and Resource Economics.
    18. Lakdawalla, Darius & Zanjani, George, 2005. "Insurance, self-protection, and the economics of terrorism," Journal of Public Economics, Elsevier, vol. 89(9-10), pages 1891-1905, September.
    19. Edlin, Aaron S. & Karaca-Mandic, Pinar, 2005. "The Accident Externality from Driving," Department of Economics, Working Paper Series qt0hw1m6q2, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
    20. Vicki M. Bier & Shi‐Woei Lin, 2013. "Should the Model for Risk‐Informed Regulation be Game Theory Rather than Decision Theory?," Risk Analysis, John Wiley & Sons, vol. 33(2), pages 281-291, February.
    21. Srivastava Astha & Srivastava Ankur, 2021. "Economic Analysis of Accident Law: A New Liability Rule that Induces Socially Optimal Behaviour in Case of Limited Information," Review of Law & Economics, De Gruyter, vol. 17(1), pages 119-131, March.

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