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Optimal Liability for Terrorism


  • Darius Lakdawalla
  • Eric Talley


This paper analyzes the normative role for civil liability in aligning terrorism precaution incentives, when the perpetrators of terrorism are unreachable by courts or regulators. We consider the strategic interaction among targets, subsidiary victims, and terrorists within a sequential, game-theoretic model. The model reveals that, while an "optimal" liability regime indeed exists, its features appear at odds with conventional legal templates. For example, it frequently prescribes damages payments from seemingly unlikely defendants, directing them to seemingly unlikely plaintiffs. The challenge of introducing such a regime using existing tort law doctrines, therefore, is likely to be prohibitive. Instead, we argue, efficient precaution incentives may be best provided by alternative policy mechanisms, such as a mutual public insurance pool for potential targets of terrorism, coupled with direct compensation to victims of terrorist attacks.

Suggested Citation

  • Darius Lakdawalla & Eric Talley, 2006. "Optimal Liability for Terrorism," NBER Working Papers 12578, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:12578
    Note: LE

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    References listed on IDEAS

    1. Keohane, Nathaniel O & Zeckhauser, Richard J, 2003. "The Ecology of Terror Defense," Journal of Risk and Uncertainty, Springer, vol. 26(2-3), pages 201-229, March-May.
    2. A. Mitchell Polinsky & Yeon-Koo Che, 1991. "Decoupling Liability: Optimal Incentives for Care and Litigation," RAND Journal of Economics, The RAND Corporation, vol. 22(4), pages 562-570, Winter.
    3. Ian Ayres & Steven D. Levitt, 1998. "Measuring Positive Externalities from Unobservable Victim Precaution: An Empirical Analysis of Lojack," The Quarterly Journal of Economics, Oxford University Press, vol. 113(1), pages 43-77.
    4. Shavell, Steven, 1991. "Individual precautions to prevent theft: Private versus socially optimal behavior," International Review of Law and Economics, Elsevier, vol. 11(2), pages 123-132, September.
    5. Lakdawalla, Darius & Zanjani, George, 2005. "Insurance, self-protection, and the economics of terrorism," Journal of Public Economics, Elsevier, vol. 89(9-10), pages 1891-1905, September.
    6. Freeman, Scott & Grogger, Jeffrey & Sonstelie, Jon, 1996. "The Spatial Concentration of Crime," Journal of Urban Economics, Elsevier, vol. 40(2), pages 216-231, September.
    7. Albert Choi & Chris William Sanchirico, 2004. "Should Plaintiffs Win What Defendants Lose? Litigation Stakes, Litigation Effort, and the Benefits of Decoupling," The Journal of Legal Studies, University of Chicago Press, vol. 33(2), pages 323-354, June.
    8. Donald B. Hausch & Yeon-Koo Che, 1999. "Cooperative Investments and the Value of Contracting," American Economic Review, American Economic Association, vol. 89(1), pages 125-147, March.
    9. Kunreuther, Howard & Heal, Geoffrey, 2003. "Interdependent Security," Journal of Risk and Uncertainty, Springer, vol. 26(2-3), pages 231-249, March-May.
    10. Alan Schwartz, 2004. "The Law and Economics of Costly Contracting," Journal of Law, Economics, and Organization, Oxford University Press, vol. 20(1), pages 2-31, April.
    11. Alan Schwartz & Joel Watson, "undated". "The Law and Economics of Costly Contracting," Yale Law School John M. Olin Center for Studies in Law, Economics, and Public Policy Working Paper Series yale_lepp-1004, Yale Law School John M. Olin Center for Studies in Law, Economics, and Public Policy.
    12. Hui-Wen, Koo & Png, I. P. L., 1994. "Private security: Deterrent or diversion?," International Review of Law and Economics, Elsevier, vol. 14(1), pages 87-101, March.
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    JEL classification:

    • K13 - Law and Economics - - Basic Areas of Law - - - Tort Law and Product Liability; Forensic Economics

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