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Relative Performance of Liability Rules: Experimental Evidence

  • Angelova, Vera
  • Attanasi, Giuseppe
  • Hiriart, Yolande

We compare the performance of liability rules for managing environmental disasters when third parties are harmed and cannot always be compensated. A firm can invest in safety to reduce the likelihood of accidents. The firm’s investment is unobservable to authorities. Externality and asymmetric information call for public intervention to define rules aimed at increasing prevention. We determine the investment in safety under No Liability, Strict Liability and Negligence, and compare it to the first best. Additionally, we investigate how the (dis)ability of the firm to fully cover potential damages affects the firm’s behavior. An experiment tests the theoretical predictions. In line with theory, Strict Liability and Negligence are equally effective; both perform better than No Liability; investment in safety is not sensitive to the ability of the firm to compensate potential victims. In contrast with theory, prevention rates absent liability are much higher and liability is much less effective than predicted.

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Paper provided by Toulouse School of Economics (TSE) in its series TSE Working Papers with number 12-304.

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Date of creation: Apr 2012
Date of revision: Sep 2012
Handle: RePEc:tse:wpaper:25820
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  3. HIRIART Yolande & MARTIMORT David, 2006. "The Benefits of Extended Liability," LERNA Working Papers 06.28.221, LERNA, University of Toulouse.
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  23. Alberini, Anna & Austin, David H., 1999. "Strict Liability as a Deterrent in Toxic Waste Management: Empirical Evidence from Accident and Spill Data," Journal of Environmental Economics and Management, Elsevier, vol. 38(1), pages 20-48, July.
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  26. Greiner, Ben, 2004. "An Online Recruitment System for Economic Experiments," MPRA Paper 13513, University Library of Munich, Germany.
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