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When Will Judgment Proof Injurers Take Too Much Precaution?

  • G. Dari Mattiacci
  • G.G.A. de Geest

Abstract This article identifies the conditions under which potentially insolvent injurers over-invest in precaution. We show that this may happen only with respect to precautionary measures that reduce the probability of the accident. No such result occurs if precaution only reduces the magnitude of the harm. Contrary to the literature, we find that over-precaution may also occur when precaution is non-monetary. The reason being is that over-precaution can not only be due to the implicit precaution-subsidy effect (the fact that care-taking reduces the injurer’s exposure to liability when precaution is monetary) but also to a substitution effect between precaution that reduces the probability of accidents and precaution that reduces the magnitude of the harm. Finally, we find that when the injurer’s wealth is sufficiently low, precautions may actually be lower when they are monetary than when they are non-monetary, despite the implicit precaution subsidy in the former case. Keywords: insolvency, judgement, liability, bankruptcy, over precaution

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Paper provided by Utrecht School of Economics in its series Working Papers with number 04-27.

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Date of creation: 2004
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Handle: RePEc:use:tkiwps:0427
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  1. Dionne, G. & Eeckhoudt, L., 1984. "Self-Insurance, Self-Protection and Increased Risk Aversion," Cahiers de recherche 8424, Universite de Montreal, Departement de sciences economiques.
  2. Miceli, Thomas J. & Segerson, Kathleen, 2003. "A note on optimal care by wealth-constrained injurers," International Review of Law and Economics, Elsevier, vol. 23(3), pages 273-284, September.
  3. Giuseppe Dari-Mattiacci & Gerrit De Geest, 2005. "Judgment Proofness under Four Different Precaution Technologies," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 161(1), pages 38-, March.
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  8. Juan José Ganuza & Fernando Gómez, 2003. "Optimal negligence rule under limited liability," Economics Working Papers 759, Department of Economics and Business, Universitat Pompeu Fabra, revised May 2004.
  9. Boyd, James & Ingberman, Daniel E, 1994. "Noncompensatory Damages and Potential Insolvency," The Journal of Legal Studies, University of Chicago Press, vol. 23(2), pages 895-910, June.
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  11. 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 427-47, June.
  12. Rose-Ackerman, Susan, 1991. "Regulation and the Law of Torts," American Economic Review, American Economic Association, vol. 81(2), pages 54-58, May.
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  15. Steven Shavell, 2002. "Minimum Asset Requirements," NBER Working Papers 9335, National Bureau of Economic Research, Inc.
  16. T. Randolph Beard, 1990. "Bankruptcy and Care Choice," RAND Journal of Economics, The RAND Corporation, vol. 21(4), pages 626-634, Winter.
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