Abstract
Traditional economic models of accident law are static and assume homogeneous individuals under perfect information. This paper relaxes these assumptions and presents a dynamic unilateral accident model in which potential injurers differ in their probability of accident. Information about individual risk-type is hidden from the social planner and from each potential injurer. We ask how negligence standards should be optimally tailored to individual risk-type when this is imperfectly observable. We argue that information about past accident experiences helps to efficiently define negligence standards, narrowing the distance between first-best standards perfectly tailored to individual risk-type and third-best averaged standards. We finally show that negligence standards refined on the basis of past accident experiences and of individual risk-type do not undermine private incentives to undertake due care.
Highlights
The standard unilateral care accident model is generally a 1-period model in which potential injurers are identical and have complete information about their probabilities of accident
We consider a 2-period, unilateral care accident model in which potential injurers differ in their probabilities of accident
Our analysis shows that when information about an individual’s risk type is hidden but accident records are available, the second-best solution is implemented by tailoring due levels of care to incidents of past accidents, whereas the uniform, averaged due level of care characterizes the third-best solution
Summary
The standard unilateral care accident model is generally a 1-period model in which potential injurers are identical and have complete information about their probabilities of accident (their risk types). The relevance and timely nature of the present paper is underscored by the fact that the discussion on personalizing due levels of care in the legal literature has been revived by Ben-Shahar and Porat (2016), in which past information about similar behavior is discussed as a proxy for potential injurers’ abilities and tendencies with respect to risk creation and precaution taking.5 This suggests that a driver’s traffic violation or an instance of medical malpractice by a physician can be used by the court in personalizing the standard of care. Exceptions include Levmore (1990) and Polinsky and Shavell (1998a), which analyze whether sanctions should depend on prior offenses We contribute to this literature by showing that the current system of imposing punitive damages or greater sanctions on repeat offenders is less efficient at minimizing social costs than our proposal of tailoring negligence standards to accident records. Appendix A presents the theoretical model, and Appendix B sketches the proofs of the main results
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