Abstract
This paper studies an integrated government choice of enforcement, liability design, and regulatory policy in a model of unilateral accidents, the risk of which can be reduced when firms exercise “care.” The analysis imparts new motives to two observed features of government policy. First, the direct ex-ante regulation of care can be more efficient than imposing ex-post liability for harm even when the government’s cost of monitoring care (as required under ex-ante regulation) is significantly higher than the cost of monitoring accidents (as needed under ex-post liability). Second, in both ex-ante and ex-post regulatory regimes, optimal care-contingent sanctions take a familiar “negligence” form, completely exempting non-negligent firms from liability.
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