Abstract

Abstract In accident law, we seek a liability rule that will induce both the parties to adopt socially optimal levels of precaution. Economic analysis, however, shows that none of the commonly used liability rules induce both parties to adopt optimal levels, if courts have access only to ‘Limited Information’ on. In such a case, it has also been established (K. (2006). Efficiency of liability rules: a reconsideration. J. Int. Trade Econ. Dev. 15: 359–373) that no liability rule based on cost justified untaken precaution as a standard of care can be efficient. In this paper, we describe a two-step liability rule: the rule of negligence with the defence of relative negligence. We prove that this rule has a unique Nash equilibrium at socially optimal levels of care for the non-cooperative game, and therefore induces both parties to adopt socially optimal behaviour even in case of limited information.

Highlights

  • Accident laws aim to provide liability rules that apportion the costs of an accident between the injurer and the victim

  • We prove that this rule has a unique Nash equilibrium at socially optimal levels of care for the non-cooperative game, and induces both parties to adopt socially optimal behaviour even in case of limited information

  • As we show using the mathematical model of Brown, this rule does not have a Nash equilibrium at the socially optimal level

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Summary

Introduction

Accident laws aim to provide liability rules that apportion the costs of an accident between the injurer and the victim. It was established that (i) if courts have access to complete information about the range of accident precaution (i.e. they can determine the marginal benefit and cost of additional precaution at all levels of precaution), and (ii) they adopt the Hand rule as the standard of care, all of the negligence-based liability rules induce both parties to adopt socially optimal behaviour. Brown proved that in such a case, none of the negligence-based liability rules have a Nash equilibrium at socially optimal levels and they do not induce the parties to adopt the optimal level of precaution Jain (2006) has shown that any negligence-based liability rule, where the standard of care adopted is based on cost justified untaken precaution will not lead to an efficient outcome.

Mathematical Formulation of Accident Law
Comparison of Methods to Determine Standards of Care
The Rule of Negligence with Defence of Relative Negligence
Proof of Nash Equilibrium
Conclusion
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