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A Model of the Socially Optimal Use of Liability and Regulation

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  • Steven Shavell

Abstract

Liability and safety regulation are examined as means of controlling risks in a theoretical model of the occurrence of accidents. According to the model, regulation does not result in appropriate reduction of risk -- due to the regulator's lack of knowledge about risk -- nor does liability result in that outcome -- because the incentives it creates are diluted by the chance that parties would not be sued for harm done or would not be able to pay fully for it. Thus, either liability could turn out to be superior to regulation or the reverse could be true. But as is stressed, joint use of the two means of controlling risk is generally socially advantageous, and the characteristics of their optimal joint use are determined.

Suggested Citation

  • Steven Shavell, 1983. "A Model of the Socially Optimal Use of Liability and Regulation," NBER Working Papers 1220, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:1220
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    1. Martin L. Weitzman, 1974. "Prices vs. Quantities," Review of Economic Studies, Oxford University Press, vol. 41(4), pages 477-491.
    2. Richard A. Posner, 1974. "Theories of Economic Regulation," Bell Journal of Economics, The RAND Corporation, vol. 5(2), pages 335-358, Autumn.
    3. Steven Shavell, 1983. "Liability for Harm Versus Regulation of Safety," NBER Working Papers 1218, National Bureau of Economic Research, Inc.
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