Abstract
This study examines the impact of moral hazard on issues concerning a negligence rule versus strict liability. The study finds that when the owner of a firm hires an employee to preside over potentially hazardous activities, different liability rules motivate the owner to induce the employee to exert different levels of care. The results demonstrate that whether greater care in the prevention of industrial accidents is induced by a strict or negligence liability rule depends upon the utility function of the agent and the degree of moral hazard present in the employment relationship. To implement the analysis, the article discusses a mechanism that allows a negligence liability system to be implemented when effort is not observable. Finally, under a negligence rule, both the level of the optimal due care standard and the agent's level of accident prevention effort will generally depend on whether moral hazard is present within the firm. These results imply that courts should consider the level of moral hazard within the firm prior to establishing the rule of law that will be employed when assessing liability in the event of an industrial accident.
Published Version
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