Optimal Standards of Negligence When One Party is Uninformed of the Standards

Abstract

When a court sets standards of due care in a tort or contract case with a view to how the standards will affect future behavior of parties similar to the litigants, it should sometimes realize that only one of the two future parties is likely to become informed of the standards. The standards can then only have a direct effect on the behavior of the informed party, and it may be thought that the court should hold the informed party strictly liable, which maximizes this effect. However, this ignores that the informed party may, although strictly liable, lower her level of care in order to induce the uninformed party to take greater care. In this situation, the negligence rule may do better than strict liability, since the discontinuity of the negligence rule can prevent the informed party from strategically lowering her level of care. Under the negligence rule, optimal standards are sensitive to whether the informed party acts first and to whether she is the injurer or the victim. For both the informed and the uninformed, there are circumstances in which the standard should be higher than first best and other circumstances where it should be lower. However, in the prevalent case where the informed party is the injurer and acts first, and the uninformed understands the risk, the court should under certain conditions set the standard for the informed party set at the first best level. The uninformed should then infer that the informed party has an incentive to take due care, and so take proper precautions himself. Moreover, the court should generally apply a lenient standard of due care to the uninformed victim, as this maximizes the incentive for the informed party to take due care without diminishing the incentive of the uninformed party.