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Relative Performance of Liability Rules: Experimental Evidence

  • Vera Angelova

    ()

    (Technical University Berlin)

  • Olivier Armantier

    ()

    (Federal Reserve Bank of New York)

  • Giuseppe Attanasi

    ()

    (University of Strasbourg and Toulouse School of Economics)

  • Yolande Hiriart

    ()

    (CRESE, Université de Franche-comté)

We compare the performance of liability rules for managing environmental disasters when third parties are harmed and cannot always be compensated. A firm can invest in safety to reduce the likelihood of accidents. The firm's investment is unobservable to authorities. The presence of externalities and asymmetric information call for public intervention in order to define rules aimed at increasing prevention. We determine the investments in safety under No Liability, Strict Liability and Negligence rules, and compare these to the first best. Additionally, we investigate how the (dis)ability of the firm to fully cover potential damage affects the firm's behavior. An experiment tests the theoretical predictions. In line with theory, Strict Liability and Negligence are equally effective; both perform better than No Liability; investment in safety is not sensitive to the ability of the firm to compensate potential victims. In contrast with theory, prevention rates absent liability are much higher, and liability is much less effective, than predicted.

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Paper provided by CRESE in its series Working Papers with number 2013-03.

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Length: 37 pages
Date of creation: Mar 2013
Date of revision:
Handle: RePEc:crb:wpaper:2013-03
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