Liability Rules, Insurance and the Coase Theorem

In the absence of any empirical evidence on the effect of liability laws, major enquiries into accident prevention and compensation in the U.K., Australia and New Zealand in the last fifteen years have tended to discount the role of liability laws in deterring careless behaviour. The main basis for this conclusion is the fact that for most accidents (e.g., motor vehicle and workplace accidents) the cost of compensation is met by insurance companies. To the extent that liability rules affect individual behaviour there will be an effect on the resources devoted to accident prevention. This paper, after briefly surveying the economics of liability rules and insurance, develops a model which will be used for future empirical work on the effects of liability rules on accidents. A major conclusion is that, contrary to the COASE theorem, liability rules will have more effect when bargaining is possible than when it is not possible, when imperfect insurance is present. In the large number case (e.g., motor vehicle accident), ‘no–fault compensation schemes can be theoretically justified as there is no deterrent effect from liability laws in the presence of imperfect compulsory insurance.