IDEAS home Printed from https://ideas.repec.org/p/bol/bodewp/wp1176.html
   My bibliography  Save this paper

Efficient liability law when parties genuinely disagree

Author

Listed:
  • Luigi Alberto Franzoni

Abstract

This article compares the classic liability rules, negligence and strict liability, under the hypothesis that injurers and victims formulate subjective beliefs about the probabilities of harm. Parties may reasonably disagree in their assessment of the precautionary measures available: a measure regarded as safe by one party may be regarded as not safe by the other. By relying on the notions of Pareto efficiency and "No Betting" Pareto efficiency, the article shows that negligence is the optimal liability rule when injurers believe that the probability of harm is always higher than the victims do, while strict liability with overcompensatory damages is the optimal rule in the opposite case. The same results apply to bilateral accidents and, specifically, to product-related harms in competitive markets. Overcompensatory ("punitive") damages provide consumers with insurance against their own pessimism.

Suggested Citation

  • Luigi Alberto Franzoni, 2022. "Efficient liability law when parties genuinely disagree," Working Papers wp1176, Dipartimento Scienze Economiche, Universita' di Bologna.
    • Handle: RePEc:bol:bodewp:wp1176
    as

    Download full text from publisher

    File URL: http://amsacta.unibo.it/7065/1/WP1176.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Luigi Alberto Franzoni, 2016. "Correlated Accidents," American Law and Economics Review, Oxford University Press, vol. 18(2), pages 358-384.
    2. Shoshana Vasserman & Muhamet Yildiz, 2019. "Pretrial negotiations under optimism," RAND Journal of Economics, RAND Corporation, vol. 50(2), pages 359-390, June.
    3. Hill , Brian & Danan , Eric, 2014. "Aggregating Tastes, Beliefs, and Attitudes Under Uncertainty," HEC Research Papers Series 1057, HEC Paris.
    4. Eric Danan & Thibault Gajdos & Brian Hill & Jean-Marc Tallon, 2016. "Robust Social Decisions," American Economic Review, American Economic Association, vol. 106(9), pages 2407-2425, September.
    5. Luigi Alberto Franzoni, 2017. "Liability Law under Scientific Uncertainty," American Law and Economics Review, Oxford University Press, vol. 19(2), pages 327-360.
    6. Surajeet Chakravarty & David Kelsey, 2017. "Ambiguity and Accident Law," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 19(1), pages 97-120, February.
    7. Christine Jolls & Cass R. Sunstein, 2006. "Debiasing through Law," The Journal of Legal Studies, University of Chicago Press, vol. 35(1), pages 199-242, January.
    8. Eric Danan & Thibault Gajdos & Brian Hill & Jean-Marc Tallon, 2016. "Robust Social Decisions," American Economic Review, American Economic Association, vol. 106(9), pages 2407-2425, September.
    9. repec:oup:alecon:v:18:y:2016:i:2:p:358-384. is not listed on IDEAS
    10. Steven Shavell, 1982. "On Liability and Insurance," Bell Journal of Economics, The RAND Corporation, vol. 13(1), pages 120-132, Spring.
    11. Peter A. Diamond, 1974. "Single Activity Accidents," The Journal of Legal Studies, University of Chicago Press, vol. 3(1), pages 107-164, January.
    12. Michael Spence, 1977. "Consumer Misperceptions, Product Failure and Producer Liability," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 44(3), pages 561-572.
    13. Peter Klibanoff & Massimo Marinacci & Sujoy Mukerji, 2005. "A Smooth Model of Decision Making under Ambiguity," Econometrica, Econometric Society, vol. 73(6), pages 1849-1892, November.
    14. Chateauneuf, Alain & Eichberger, Jurgen & Grant, Simon, 2007. "Choice under uncertainty with the best and worst in mind: Neo-additive capacities," Journal of Economic Theory, Elsevier, vol. 137(1), pages 538-567, November.
    15. Matthias Lang, 2017. "First-Order and Second-Order Ambiguity Aversion," Management Science, INFORMS, vol. 63(4), pages 1254-1269, April.
    16. Markus K. Brunnermeier & Alp Simsek & Wei Xiong, 2014. "A Welfare Criterion For Models With Distorted Beliefs," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 129(4), pages 1753-1797.
    17. Segal, Uzi & Spivak, Avia, 1990. "First order versus second order risk aversion," Journal of Economic Theory, Elsevier, vol. 51(1), pages 111-125, June.
    18. Joshua C. Teitelbaum, 2007. "A Unilateral Accident Model under Ambiguity," The Journal of Legal Studies, University of Chicago Press, vol. 36(2), pages 431-477, June.
    19. Mongin, Philippe, 2016. "Spurious Unanimity And The Pareto Principle," Economics and Philosophy, Cambridge University Press, vol. 32(3), pages 511-532, November.
    20. Kathryn E. Spier & J.J. Prescott, 2019. "Contracting on litigation," RAND Journal of Economics, RAND Corporation, vol. 50(2), pages 391-417, June.
    21. Morris, Stephen, 1995. "The Common Prior Assumption in Economic Theory," Economics and Philosophy, Cambridge University Press, vol. 11(2), pages 227-253, October.
    22. Kalra, Nidhi & Paddock, Susan M., 2016. "Driving to safety: How many miles of driving would it take to demonstrate autonomous vehicle reliability?," Transportation Research Part A: Policy and Practice, Elsevier, vol. 94(C), pages 182-193.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Chen Li, 2022. "Preference Aggregation with a Robust Pareto Criterion," KIER Working Papers 1086, Kyoto University, Institute of Economic Research.
    2. L. A. Franzoni, 2016. "Optimal liability design under risk and ambiguity," Working Papers wp1048, Dipartimento Scienze Economiche, Universita' di Bologna.
    3. Fleurbaey, Marc & Zuber, Stéphane, 2017. "Fair management of social risk," Journal of Economic Theory, Elsevier, vol. 169(C), pages 666-706.
    4. McCarthy, David & Mikkola, Kalle & Thomas, Teruji, 2016. "Utilitarianism with and without expected utility," MPRA Paper 72578, University Library of Munich, Germany.
    5. Philippe Mongin & Marcus Pivato, 2020. "Social preference under twofold uncertainty," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 70(3), pages 633-663, October.
    6. Pivato, Marcus, 2022. "Bayesian social aggregation with accumulating evidence," Journal of Economic Theory, Elsevier, vol. 200(C).
    7. Zuber, Stéphane, 2016. "Harsanyi’s theorem without the sure-thing principle: On the consistent aggregation of Monotonic Bernoullian and Archimedean preferences," Journal of Mathematical Economics, Elsevier, vol. 63(C), pages 78-83.
    8. Wang, Weijia, 2019. "A Pareto Criterion on Systemic Risk," MPRA Paper 93699, University Library of Munich, Germany.
    9. Kaname Miyagishima, 2022. "Efficiency, equity, and social rationality under uncertainty," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 73(1), pages 237-255, February.
    10. Federica Ceron & Vassili Vergopoulos, 2019. "Aggregation of Bayesian preferences: unanimity vs monotonicity," Social Choice and Welfare, Springer;The Society for Social Choice and Welfare, vol. 52(3), pages 419-451, March.
    11. Takashi Hayashi & Michele Lombardi, 2019. "Fair social decision under uncertainty and belief disagreements," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 67(4), pages 775-816, June.
    12. Luigi Alberto Franzoni, 2019. "Legal Change in the Face of Risk-Averse Subjects: A Generalization of the Theory," American Law and Economics Review, American Law and Economics Association, vol. 21(2), pages 394-430.
    13. Weijia Wang & Shaoan Huang, 2021. "Risk sharing and financial stability: a welfare analysis," Journal of Economic Interaction and Coordination, Springer;Society for Economic Science with Heterogeneous Interacting Agents, vol. 16(1), pages 211-228, January.
    14. McCarthy, David & Mikkola, Kalle & Thomas, Teruji, 2020. "Utilitarianism with and without expected utility," Journal of Mathematical Economics, Elsevier, vol. 87(C), pages 77-113.
    15. Federica Ceron & Vassili Vergopoulos, 2017. "Aggregation of Bayesian preferences: Unanimity vs Monotonicity," Post-Print halshs-01539444, HAL.
    16. Ghirardato, Paolo & Pennesi, Daniele, 2020. "A general theory of subjective mixtures," Journal of Economic Theory, Elsevier, vol. 188(C).
    17. Hill, Brian, 2016. "Incomplete preferences and confidence," Journal of Mathematical Economics, Elsevier, vol. 65(C), pages 83-103.
    18. Langlais, Eric, 2010. "Safety and the Allocation of Costs in Large Accidents," MPRA Paper 25710, University Library of Munich, Germany.
    19. Federica Ceron & Vassili Vergopoulos, 2017. "Aggregation of Bayesian preferences: Unanimity vs Monotonicity," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) halshs-01539444, HAL.
    20. Berens, Stefan & Chochua, Lasha, 2017. "The impartial observer under uncertainty," Center for Mathematical Economics Working Papers 576, Center for Mathematical Economics, Bielefeld University.

    More about this item

    JEL classification:

    • K13 - Law and Economics - - Basic Areas of Law - - - Tort Law and Product Liability; Forensic Economics
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • D62 - Microeconomics - - Welfare Economics - - - Externalities

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:bol:bodewp:wp1176. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Dipartimento Scienze Economiche, Universita' di Bologna (email available below). General contact details of provider: https://edirc.repec.org/data/sebolit.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.