Buying the Right to Harm: The Economics of Buyouts
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.
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Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems
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