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A Model of the Socially Optimal Use of Liability and Regulation

  • Steven Shavell

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.

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File URL: http://www.nber.org/papers/w1220.pdf
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 1220.

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Date of creation: Oct 1983
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Publication status: published as Shavell, Steven. "A Model of the Optimal Use of Liability and Safety Regulation." Rand Journal of Economics, Vol. 15, No. 2, (Summer 1984), pp. 271- 280.
Handle: RePEc:nbr:nberwo:1220
Note: LE
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  1. Richard A. Posner, 1974. "Theories of Economic Regulation," NBER Working Papers 0041, National Bureau of Economic Research, Inc.
  2. Steven Shavell, 1983. "Liability for Harm Versus Regulation of Safety," NBER Working Papers 1218, National Bureau of Economic Research, Inc.
  3. Weitzman, Martin L, 1974. "Prices vs. Quantities," Review of Economic Studies, Wiley Blackwell, vol. 41(4), pages 477-91, October.
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