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Buying the Right to Harm: The Economics of Buyouts

Author

Listed:
  • Ehud Guttel

    (Duke Law School)

  • Shmuel Leshem

    (USC School of Law)

Abstract

Many injurers now offer to buy out victims' property to reduce harm. This pa- per examines the e¢ ciency of buyouts negotiated in the shadow of regulation and liability rules which require injurers to take e¢ cient precautions. It shows that if the social bene?t from precautions is increasing with victims?expected harm, buyouts reduce social welfare. Because buyouts allow injurers to take fewer precautions, a buyout of one victim produces a negative externality for the remaining victims. The injurer can thus exploit victims through a "divide-and-conquer" strategy: making simultaneous, discriminatory take-it-or-leave-it buyout offers. The injurer's profit from buyouts is greater if o¤ers are sequential. Perhaps most surprisingly, buyouts reduce social welfare and victims' joint profits even if victims make simultaneous or sequential take-it-or-leave-it buyout demands to the injurer.

Suggested Citation

  • Ehud Guttel & Shmuel Leshem, 2011. "Buying the Right to Harm: The Economics of Buyouts," CAE Working Papers 93, Aix-Marseille Université, CERGAM.
    • Handle: RePEc:cgm:wpaper:93
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    References listed on IDEAS

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    Cited by:

    1. Guttel, Ehud & Leshem, Shmuel, 2013. "Bargaining around cost–benefit standards," Journal of Public Economics, Elsevier, vol. 103(C), pages 55-67.

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    More about this item

    Keywords

    Cost-benefit standards; divide and conquer; harmful externalities;
    All these keywords.

    JEL classification:

    • K13 - Law and Economics - - Basic Areas of Law - - - Tort Law and Product Liability; Forensic Economics
    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games

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