A Model of the Optimal Use of Liability and Safety Regulation

Abstract

A model of the occurrence of accidents is used to examine liability and safety regulation as means of controlling risks. According to the model, regulation does not result in the appropriate reduction of risk--because the regulator lacks perfect information--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, neither liability nor regulation is necessarily better than the other, and as is stressed, their joint use is generally socially advantageous.