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Optimal Liability Sharing and Court Errors : An Exploratory Analysis

  • BOYER, Marcel
  • PORRINI, Donatella

We focus in this paper on the effects of court errors on the optimal sharing of liability between firms and financiers, as an environmental policy instrument. Using a structural model of the interactions between firms, financial institutions, governments and courts we show, through numerical simulations, the distortions in liability sharing between firms and financiers that the imperfect implementation of government policies implies. We consider in particular the role played by the efficiency of the courts in avoiding Type I (finding an innocent firm guilty of inappropriate care) and Type II (finding a guilty firm innocent of inappropriate care) errors. This role is considered in a context where liability sharing is already distorted (when compared with first best values) due not only to the courts’ own imperfect assessment of safety care levels exerted by firm but also to the presence of moral hazard and adverse selection in financial contracting, as well as of noncongruence of objectives between firms and financiers on the one hand and social welfare maximization on the other. Our results indicate that an increase in the efficiency of the court system in avoiding errors raises safety care levels, thereby reducing the probability of accident, and allowing the social welfare maximizing government to impose a lower liability [higher] share for firms [financiers] as well as a lower standard level of care.

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Paper provided by Centre interuniversitaire de recherche en économie quantitative, CIREQ in its series Cahiers de recherche with number 05-2010.

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Length: 27 pages
Date of creation: 2010
Date of revision:
Handle: RePEc:mtl:montec:05-2010
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  1. Schmitz, Patrick W., 2000. "On the Joint Use of Liability and Safety Regulation," MPRA Paper 12536, University Library of Munich, Germany.
  2. repec:ner:tilbur:urn:nbn:nl:ui:12-85388 is not listed on IDEAS
  3. Png, I. P. L., 1987. "Litigation, liability, and incentives for care," Journal of Public Economics, Elsevier, vol. 34(1), pages 61-85, October.
  4. Boyer, M. & Laffont, J.J., 1995. "Environmental Risks and Bank Liability," Cahiers de recherche 9501, Centre interuniversitaire de recherche en économie quantitative, CIREQ.
  5. Marco, Alan C., 2005. "Learning by Suing: Structural Estimates of Court Errors in Patent Litigation," Vassar College Department of Economics Working Paper Series 68, Vassar College Department of Economics.
  6. Bhole, Bharat & Wagner, Jeffrey, 2008. "The joint use of regulation and strict liability with multidimensional care and uncertain conviction," International Review of Law and Economics, Elsevier, vol. 28(2), pages 123-132, June.
  7. Marcel Boyer & Donatella Porrini, 2004. "Modelling the choice between regulation and liability in terms of social welfare," Canadian Journal of Economics, Canadian Economics Association, vol. 37(3), pages 590-612, August.
  8. Bhole, Bharat, 2007. "Due-care standards in a market setting with legal error," International Review of Law and Economics, Elsevier, vol. 27(2), pages 154-169.
  9. Marcel Boyer & Donatella Porrini, 2008. "The Efficient Liability Sharing Factor For Environmental Disasters: Lessons For Optimal Insurance Regulation," CIRANO Working Papers 2008s-03, CIRANO.
  10. Marcel Boyer & Tracy Lewis & Wei Lin Liu, 1996. "Setting Standards for Credible Compliance and Law Enforcement," CIRANO Working Papers 96s-27, CIRANO.
  11. BOYER, Marcel, 1995. "Environmental Protection Producer Insolvency and Lender Liability," Cahiers de recherche 9557, Universite de Montreal, Departement de sciences economiques.
  12. Andrew F. Daughety & Jennifer F. Reinganum, 2003. "Markets, Torts and Social Inefficiency," Vanderbilt University Department of Economics Working Papers 0308, Vanderbilt University Department of Economics.
  13. Boyd, James, 2001. "Financial Responsibility for Environmental Obligations: Are Bonding and Assurance Rules Fulfilling Their Promise?," Discussion Papers dp-01-42, Resources For the Future.
  14. Kaplow, Louis, 1994. "The Value of Accuracy in Adjudication: An Economic Analysis," The Journal of Legal Studies, University of Chicago Press, vol. 23(1), pages 307-401, January.
  15. Marie-Cécile Fagart & Claude Fluet, 2007. "Liability Insurance under the Negligence Rule," Cahiers de recherche 0730, CIRPEE.
  16. Kolstad, Charles D & Ulen, Thomas S & Johnson, Gary V, 1990. "Ex Post Liability for Harm vs. Ex Ante Safety Regulation: Substitutes or Complements?," American Economic Review, American Economic Association, vol. 80(4), pages 888-901, September.
  17. Marcel Boyer & Donatella Porrini, 2000. "Law versus Regulation: A Political Economy Model of Instrument Choice in Environmental Policy," CIRANO Working Papers 2000s-57, CIRANO.
  18. Boyer, Marcel & Dionne, Georges, 1983. "Riscophobie et étalement à moyenne constante : analyse et applications," L'Actualité Economique, Société Canadienne de Science Economique, vol. 59(2), pages 208-229, juin.
  19. Burrows, Paul, 1999. "Combining regulation and legal liability for the control of external costs," International Review of Law and Economics, Elsevier, vol. 19(2), pages 227-244, June.
  20. Feess, E. & Hege, U., 2000. "Environmental harm and financial responsibility," Other publications TiSEM 7122a4d0-683c-49ed-a55f-0, Tilburg University, School of Economics and Management.
  21. Eberhard Feess & Ulrich Hege, 2000. "Environmental Harm and Financial Responsibility*," The Geneva Papers on Risk and Insurance - Issues and Practice, Palgrave Macmillan, vol. 25(2), pages 220-234, April.
  22. Marcel Boyer & Donatella Porrini, 2008. "The Efficient Liability Sharing Factor for Environmental Disasters: Lessons for Optimal Insurance Regulation*," The Geneva Papers on Risk and Insurance - Issues and Practice, Palgrave Macmillan, vol. 33(2), pages 337-362, April.
  23. Dominique Demougin & Claude Fluet, 2008. "Rules of proof, courts, and incentives," RAND Journal of Economics, RAND Corporation, vol. 39(1), pages 20-40.
  24. A. Mitchell Polinsky & Steven Shavell, 2005. "The Theory of Public Enforcement of Law," Discussion Papers 05-004, Stanford Institute for Economic Policy Research.
  25. Pitchford, Rohan, 1995. "How Liable Should a Lender Be? The Case of Judgment-Proof Firms and Environmental Risk," American Economic Review, American Economic Association, vol. 85(5), pages 1171-86, December.
  26. Innes, Robert, 2004. "Enforcement costs, optimal sanctions, and the choice between ex-post liability and ex-ante regulation," International Review of Law and Economics, Elsevier, vol. 24(1), pages 29-48, March.
  27. Ringleb, Al H & Wiggins, Steven N, 1990. "Liability and Large-Scale, Long-term Hazards," Journal of Political Economy, University of Chicago Press, vol. 98(3), pages 574-95, June.
  28. Trebilcock, Michael & Winter, Ralph A., 1997. "The economics of nuclear accident law," International Review of Law and Economics, Elsevier, vol. 17(2), pages 215-243, June.
  29. Marcel Boyer & Donatella Porrini, 2007. "Sharing Liability Between Banks and Firms: The Case of Industrial Safety Risk," CIRANO Working Papers 2007s-04, CIRANO.
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