Abstract
In this paper, we analyze two ways in which liability can be reduced: caps (the judgment proof problem) versus proportional reductions (the disappearing defendant problem). We show that these two problems have different incentive effects and hence yield dissimilar levels of social welfare. Moreover, when they occur simultaneously, they may have offsetting effects. We also show that the negligence rule with cause-in-fact may yield lower (rather than greater) levels of social welfare than strict liability. Finally, we analyze the optimal setting of the negligence standard. Our model encompasses different precaution technologies as well as monetary vs. non-monetary precautions.
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