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A Neglected Interdependency in Liability Theory

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  • Hoffmann, Sandra

    () (Resources for the Future)

  • Schwartz, Warren
  • Dharmapala, Dhammika

Abstract

The standard economic model of bilateral precaution concludes that (in the absence of uncertainty, misperception, or error) all negligence-based liability rules induce socially optimal behavior by both injurers and victims. This paper generalizes the standard model to consider situations in which one party’s precaution affects not only expected accident loss, but also directly affects the other party’s effort—or cost—of taking precaution. If the injurer’s care affects the victim’s precaution costs (but not vice versa), most of the standard results continue to hold (except for strict liability with a defense of contributory negligence). If the victim’s precaution affects the injurer’s costs of care (but not vice versa), only strict liability with a defense of contributory negligence leads to the social optimum, while the other negligence-based rules lead to suboptimal outcomes. In the general case (where each party’s costs depend on both parties’ levels of precaution), none of the standard liability rules induce socially optimal behavior in both parties. The paper’s other main result concerns the possibility of self-interested, negligent behavior in equilibrium. Under negligence with a defense of contributory negligence, the only equilibrium is in the mixed strategies of both injurer and victim. This involves the parties choosing (with strictly positive probability) to behave negligently, and gives rise to the possibility of successful litigation in equilibrium, even though there is no uncertainty, misperception, or error. The paper concludes by considering the implications of these results for the design of liability rules.

Suggested Citation

  • Hoffmann, Sandra & Schwartz, Warren & Dharmapala, Dhammika, 2001. "A Neglected Interdependency in Liability Theory," Discussion Papers dp-01-13, Resources For the Future.
  • Handle: RePEc:rff:dpaper:dp-01-13
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    File URL: http://www.rff.org/RFF/documents/RFF-DP-01-13.pdf
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    References listed on IDEAS

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    1. Schmitz, Patrick W., 2000. "On the joint use of liability and safety regulation," International Review of Law and Economics, Elsevier, vol. 20(3), pages 371-382, September.
    2. Curran, Christopher, 1992. "The spread of the comparative negligence rule in the United States," International Review of Law and Economics, Elsevier, vol. 12(3), pages 317-332, September.
    3. 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.
    4. Arlen, Jennifer H., 1990. "Re-examining liability rules when injurers as well as victims suffer losses," International Review of Law and Economics, Elsevier, vol. 10(3), pages 233-239, December.
    5. Rea, Samuel Jr., 1987. "The economics of comparative negligence," International Review of Law and Economics, Elsevier, vol. 7(2), pages 149-162, December.
    6. Ewerhart, Christian & Schmitz, Patrick W, 1998. "Ex Post Liability for Harm vs. Ex Ante Safety Regulation: Substitutes or Complements? Comment," American Economic Review, American Economic Association, vol. 88(4), pages 1027-1027, September.
    7. Endres, Alfred, 1992. "Strategic behavior under tort law," International Review of Law and Economics, Elsevier, vol. 12(3), pages 377-380, September.
    8. Emons, Winand, 1990. "Efficient liability rules for an economy with non-identical individuals," Journal of Public Economics, Elsevier, vol. 42(1), pages 89-104, June.
    9. Kahan, Marcel, 1989. "Causation and Incentives to Take Care under the Negligence Rule," The Journal of Legal Studies, University of Chicago Press, vol. 18(2), pages 427-447, June.
    10. Rose-Ackerman, Susan, 1991. "Regulation and the Law of Torts," American Economic Review, American Economic Association, vol. 81(2), pages 54-58, May.
    11. Steven Shavell, 1983. "Liability for Harm Versus Regulation of Safety," NBER Working Papers 1218, National Bureau of Economic Research, Inc.
    12. Michelle J. White, 1989. "An Empirical Test of the Comparative and Contributory Negligence Rules in Accident Law," RAND Journal of Economics, The RAND Corporation, vol. 20(3), pages 308-330, Autumn.
    13. Winand Emons & Joel Sobel, 1991. "On the Effectiveness of Liability Rules when Agents are not Identical," Review of Economic Studies, Oxford University Press, vol. 58(2), pages 375-390.
    14. Sloan, Frank A. & Reilly, Bridget A. & Schenzler, Christoph M., 1994. "Tort liability versus other approaches for deterring careless driving," International Review of Law and Economics, Elsevier, vol. 14(1), pages 53-71, March.
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    Cited by:

    1. Dhammika Dharmapala & Sandra A. Hoffmann, 2005. "Bilateral Accidents with Intrinsically Interdependent Costs of Precaution," The Journal of Legal Studies, University of Chicago Press, vol. 34(1), pages 239-272, January.

    More about this item

    Keywords

    law and economics; and tort law;

    JEL classification:

    • K13 - Law and Economics - - Basic Areas of Law - - - Tort Law and Product Liability; Forensic Economics
    • K00 - Law and Economics - - General - - - General (including Data Sources and Description)

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