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On the Existence and Efficiency of Equilibria under Liability Rules

  • Ram Singh

    (Delhi School of Economics)

While focus of the mainstream analysis of liability rules has been on negligence based liability, some recent works have recommended sharing of liability between the parties involved in an accident. In this paper, we study the implications of various approaches to liability assignment for the existence and efficiency of equilibria under liability rules. Contrary to what is suggested in the literature, we show that the sharing of liability when parties are either both negligent or both non-negligent does not threaten the existence of equilibria. Moreover, it does not dilute the incentive for the parties to take the due care. Also, we extend the analysis to search for the second-best liability rules; since in view of Shavell (1987) no liability rule can achieve the first best outcome. We show that each of the standard liability rules fails to be efficient even from from a second best perspective. We show that second best efficiency requires loss sharing between non-negligent parties. As implications of our main results, we reexamine some of the existing claims regarding the existence and efficiency of equilibria under liability rules.

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Paper provided by Centre for Development Economics, Delhi School of Economics in its series Working papers with number 150.

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Length: 37 pages
Date of creation: Sep 2006
Date of revision:
Handle: RePEc:cde:cdewps:150
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  1. Miceli, Thomas J., 1997. "Economics of the Law: Torts, Contracts, Property, Litigation," OUP Catalogue, Oxford University Press, number 9780195103908, July.
  2. Hindley, Brian & Bishop, Bill, 1983. "Accident liability rules and externality," International Review of Law and Economics, Elsevier, vol. 3(1), pages 59-68, June.
  3. Singh Ram, 2007. "Comparative Causation and Economic Efficiency: When Activity Levels are Constant," Review of Law & Economics, De Gruyter, vol. 3(2), pages 383-406, December.
  4. Oren Bar-Gill & Omri Ben-Shahar, 2003. "The Uneasy Case for Comparative Negligence," American Law and Economics Review, Oxford University Press, vol. 5(2), pages 433-469, August.
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  9. David Kaye & Mikel Aickin, 1984. "A Comment on Causal Apportionment," The Journal of Legal Studies, University of Chicago Press, vol. 13(1), pages 191-208, January.
  10. Chung, T.Y., 1992. "Efficiency of Comparative Negligence: A Game Theoretic Analysis," UWO Department of Economics Working Papers 9215, University of Western Ontario, Department of Economics.
  11. Emons,Winand, 1988. "Efficient liability rules for an economy," Discussion Paper Serie A 213, University of Bonn, Germany.
  12. Edlin, Aaron S., 1994. "Efficient standards of due care: Should courts find more parties negligent under comparative negligence?," International Review of Law and Economics, Elsevier, vol. 14(1), pages 21-34, March.
  13. Dhammika Dharmapala & Sandra A. Hoffmann, 2005. "Bilateral Accidents with Intrinsically Interdependent Costs of Precaution," The Journal of Legal Studies, University of Chicago Press, vol. 34(1), pages 239-272, 01.
  14. Paul Burrows, 1999. "A Deferential Role for Efficiency Theory in Analysing Causation-Based Tort Law," European Journal of Law and Economics, Springer, vol. 8(1), pages 29-49, July.
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  16. Steven Shavell, 2003. "Economic Analysis of Accident Law," NBER Working Papers 9483, National Bureau of Economic Research, Inc.
  17. Feldman, Allan M. & Frost, John M., 1998. "A simple model of efficient tort liability rules," International Review of Law and Economics, Elsevier, vol. 18(2), pages 201-215, June.
  18. Emons, Winand, 1990. "Efficient liability rules for an economy with non-identical individuals," Journal of Public Economics, Elsevier, vol. 42(1), pages 89-104, June.
  19. Arlen, Jennifer H., 1990. "Re-examining liability rules when injurers as well as victims suffer losses," International Review of Law and Economics, Elsevier, vol. 10(3), pages 233-239, December.
  20. Kahan, Marcel, 1989. "Causation and Incentives to Take Care under the Negligence Rule," The Journal of Legal Studies, University of Chicago Press, vol. 18(2), pages 427-47, June.
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