Strict Liability Rule Research Articles

Governing the Risks of Offshore Methane Hydrates: Part II Public and Private Regulations

The commercial development of offshore methane hydrates will necessitate planning for accidental risk. Due to the unique risks and hazards associated with the development of offshore methane hydrates, it is unlikely that their development would be capable of beginning without some form of ex ante risk governance mechanism such as civil liability or regulations. To attain efficient governance of those risks derived from the development of offshore methane hydrates, both public and private regulations should be considered as potential policy tools. This paper provides such a review, and finds that both public and private regulations can be employed as part of a broader strategy to efficiently govern the risks and hazards of offshore methane hydrates. Prior to the discussions on public and private regulation, the study provides an introduction to offshore methane hydrates. It attempts to summarize the potential commercial and welfare benefits that might be derived if offshore methane hydrates were to be developed. It also provides a survey of the potential cataclysmic and non-cataclysmic risks and hazards that would be presented if such developments were undertaken.A discussion is presented on the role of public and private regulations, how standards might set through the tool set of regulations. Second, the reasons for and advantages of public regulation to govern the risks of accidents are presented. Third, a discussion reviews the potential interactions of public regulation and private rules of civil liability. Fourth, the potential for private parties to advance private regulation to set standards and provide self-governance is examined. Finally, a discussion on the potential application of both public and private regulation to offshore methane hydrates is presented. A preliminary finding is presented that the circumstances of offshore methane hydrates would benefit from both public and private regulation.Next, specific recommendations are made as to the optimal balancing of public regulation and private regulation; an argument for the complementary implementation of public regulations alongside a rule of strict liability; an argument is also presented that private regulation could be additionally integrated alongside these two previous recommended mechanisms.

Liability Law and Uncertainty Spreading

This paper investigates the ability of liability rules to allocate uncertainty. Uncertainty includes both the standard risk and the ambiguity that arises when the causal link between conduct and harm is not conclusive, as is frequently the case with toxic torts. The optimal features of the strict liability rule and the negligence rule are obtained. Strict liability proves superior to negligence when harms are uncorrelated and victims are at least as uncertainty-averse as the injuring party. Negligence is preferable when harms are correlated and victims are numerous. Thus, negligence proves particularly apt to address systematic harms, such as those arising from design defects and warning failures. The main results also apply when accidents are bilateral and when parties can purchase insurance from an uncertainty-averse insurer.

Ambiguous Beliefs on Damages and Civil Liability Theories

This paper analyzes the meaning of comparing the economic performance of strict liability and negligence rule in a unilateral standard accident model under Knightian uncertainty. It focuses on the cost expectation of major harm on which the injurers form beliefs. It shows first that, when the Court agree with the regulator, whatever the liability regime, the first best level of care is never reached but under both regimes the tortfeasors define the same level of care. Second, when, judge and regulator disagree, it is impossible to discriminate among liability standards because the issue depends on the injurer's optimism degree.

Relative performance of liability rules: experimental evidence

We compare the performance of liability rules for managing environmental disasters when third parties are harmed and cannot always be compensated. A firm can invest in safety to reduce the likelihood of accidents. The firm’s investment is unobservable to authorities. The presence of externalities and asymmetric information call for public intervention in order to define rules aimed at increasing prevention. We determine the investments in safety under No Liability, Strict Liability, and Negligence rules, and compare these to the first best. Additionally, we investigate how the (dis)ability of the firm to fully cover potential damage affects the firm’s behavior. An experiment tests the theoretical predictions. In line with theory, Strict Liability and Negligence are equally effective; both perform better than No Liability; investment in safety is not sensitive to the ability of the firm to compensate potential victims. In contrast with theory, however, prevention rates absent liability are much higher and liability is much less effective.

Holding Distribution Utilities Liable for Outage Costs: An Economic Look

Storm-related service outages in electricity and telecommunications have created public controversies regarding the adequacy of ex ante efforts to prevent outages and ex post efforts to restore power. Product liability rules, used to promote quality of service throughout the economy, might seem to offer a solution to this problem in the utility context. Strict liability rules avoid the need for determining whether utilities were appropriately careful but increase ratepayer costs because of moral hazard and, in effect, force ratepayers to buy outage insurance from the utility. By leaving customers exposed to damage, negligence rules can avoid these shortcomings but force upon regulators and courts the need to make difficult decisions regarding efficient care levels. Profit regulation, risk aversion, regulatory commitment failures, and distributional considerations add further complications. Still, the consideration of liability rules may provide worthwhile reminders that increased reliability is neither free nor guaranteed by public provision of service.

Directive 85/374 – European Victory or a Defective Product Itself?

Over the last few decades, product liability has become a well-established area of European private law. It surfaced as a subject in its own right in the US in 1963 in the judgment of Greenman v Yuba Power Products. In contrast, modern European product liability originated over two decades later when Directive 85/374 was introduced in 1985, concerning liability for defective products (Product Liability Directive hereafter), and embracing the idea of strict liability of manufacturers for damage caused by circulating a defective product. The Directive aims for full harmonisation and the provision of a high and equal level of consumer protection. In recent years the EU Product Liability Directive has become something of a global smash hit, providing not only a template for EU Member States, but also an international blueprint used by countries worldwide, including South Africa, Australia, Brazil and countries in the Asia Pacific Region when reforming their product liability regimes. There is no doubt that the Directive politically speaking has been a major success, representing arguably the most powerful example of European harmonisation efforts within the area of tort law where previous initiatives have failed,3 and influencing the law worldwide. However its actual impact has been negligible; The Directive has not done much to unify EU product liability law in action, nor strengthened consumer protection. In the majority of countries the implementation of the Directive has not significantly affected the nature or frequency of product liability litigation. If victims sue at all they rarely make use of the special legislation implementing the Directive’s strict liability rules.

Understanding 'The Problem of Social Cost'

This paper examines the positions of Coase and Pigou in regard to the problem of external effects (externalities). Assessing their two most important works, it appears that Coase has a more relevant preference for an evaluation of total efficiency, while Pigou, with some exceptions, is convinced that it is almost always socially desirable to reach marginal efficiency through taxes or liability. It is interesting that the economist of Chicago, who has elaborated on the renowned theorem, thinks that is not desirable to reach efficiency at the margin every time, and that it is often preferable to evaluate the total, which indicates the solution that is more welfare enhancing. A certain confusion in the work of Coase is noticeable. On one hand he criticizes Pigou for statements regarding the social desirability of relocating some industries away from the towns, and on the other hand, he suggests solutions that give an absolute right for an activity that is incompatible with the activity of another subject. In this way he eliminates the possibility of having a solution that is in accordance with Coase’s idea, which stresses that any external effect is reciprocal: The adjective “reciprocal” means that a damage to Y is the consequence of limiting the activity of Y in order to allow the activity of X, and the opposite is also true: A benefit for Y causes a damage to X. Beyond this criticism, Coase’s arguments against Pigou’s tools are represented by the famous theorem, according to which a public intervention is not necessary in order to obtain efficiency when transaction costs are low. However, the theorem is not an idea that can be used to say that Pigou’s methods are useless when transaction costs are high. Indeed, when transaction costs are high, efficiency cannot be reached through negotiations. Coase, nonetheless, rejects Pigou’s tools for every situation. Through a deep examination of the paragraphs of “The Problem of Social Costs,” it is understandable why Coase opposes Pigou’s tools. First of all, he considers that the remedy consisting in the compensation of the victim. To Pigou’s way of thinking, this is a strict liability rule. Coase states that the damage is caused by both parties, and, moreover, the amount of the damage depends on both parties. He understands that the compensation method described by Pigou can bring about moral hazards and, therefore, brings about new social costs.Since the article was written in 1960, Coase’s theory has been developed and has become a pillar of tort law and economics. Pigou proposed a tax as an alternative remedy for external effects, which does not bring about a behavior of moral hazard, because the victim bears the expected costs. However, Coase is diffident in regard to the tax. His idea was not developed by other scholars in the subsequent years. Coase understands that efficiency should require a tax on the victim, so that the victim considers the increase of the costs of precaution for the injurer due to creating the nuisance. In other words, Coase understands that the tax does not produce the socially optimal activity level of the parties if the costs of precaution of the other party are not considered as a component of the tax. Therefore, Coase‘s belief is that the tools of Pigou create so many problems as to make them inefficient.

Nutritional Supplements in Sports: Myth Versus Reality

Despite strong educational messages from sports authorities insisting that a balanced diet is sufficient to cover all the nutritional requirements of elite level athletes, it is considered that between 50 and 80% of athletes regularly consume one or more nutritional supplements. Several studies conducted by anti-doping authorities over the years indicate that up to 20% of the nutritional supplements contain substances covered by the List of Prohibited Substances, which can generate an adverse result in anti-doping tests. Under the rule of strict liability as established by the World Anti-Doping Code, this is a significant risk for the athletes subject to anti-doping control in their sport practice. The nutritional supplement industry is largely unregulated and several examples of mislabeling or absence of labeling of active ingredients contained in commercial products led to sanctions of athletes and occasionally to serious consequences for some nutritional supplement manufacturers.

Equilibrium and Welfare in a Model of Torts with Industry Reputation Effects

We study the problem of torts in a framework where a firm’s accident adversely impacts all firms in the industry because of the presence of industry reputation effects. Industry reputation effects lead to interdependence among firms and give rise to strategic firm behavior. We characterize the industry equilibrium and the socially optimal industry configuration in such a setting. We then elucidate how the presence of industry reputation effects and the introduction of a liability regime in the form of a strict liability rule determine whether industry equilibrium is aligned or misaligned with the socially optimal industry configuration. Our results show that both the impact of industry reputation effects and the impact of the strict liability rule are in general contingent on the specifics of the tort problem at hand. In particular, we find that the presence of industry reputation effects can substitute for a suboptimal liability regime and that, in the presence of industry reputation effects, the introduction of the strict liability rule may be detrimental by steering the industry equilibrium away from the socially optimal industry configuration.

Should We Overlook All Altruistic Behavior by Politicians?

Not all policies benefit their intended targets even though they are motivated by political altruism. This paper analyzes how the frequency of altruistic behavior changes depending on whether consumers (i.e., the electorate) or producers (i.e., politicians) bear the responsibility. It compares the strict liability rule, which means the altruist must bear all damages, with the no liability rule, which means the recipient must bear all damages. It finds that under the no liability rule, if politicians are altruist, the frequency of altruistic behavior is less than under the strict liability rule. Therefore, the paper shows that if politicians were altruists, they would prefer the strict liability rule.

Prévention des risques technologiques à l’aide de la responsabilité civile en présence d’une innovation à double impact

Cet article vise à reconsidérer l’analyse économique de la prévention des risques technologiques (majeurs) via la responsabilité civile, dans une perspective de changement technologique : les firmes peuvent innover pour améliorer l’efficacité de leur technologie de prévention. Nous nous inspirons de travaux en économie de l’environnement d’Endres et alii (2006, 2008) tout en intégrant deux spécificités de l’analyse des risques majeurs : l’insolvabilité ex post et la possibilité de concevoir des innovations “ à double impact” (réduisant le coût de prévention et la probabilité d’accident). Contrairement à Endres et alii, nous montrons que, dans ce contexte, responsabilité sans faute et règle de négligence induisent des comportements différents, l’efficience de cette dernière dépendant du type d’innovation et du comportement du régulateur.

Equilibrium and Welfare in a Model of Torts with Industry Reputation Effects

We study the problem of torts in a framework where a firm's accident adversely impacts all firms in the industry because of the presence of industry reputation effects. Industry reputation effects lead to interdependence among firms and give rise to strategic firm behavior. We characterize the industry equilibrium and the socially optimal industry configuration in such a setting. We then elucidate how the presence of industry reputation effects and the introduction of a liability regime in the form of a strict liability rule determine whether industry equilibrium is aligned or misaligned with the socially optimal industry configuration. Our results show that both the impact of industry reputation effects and the impact of the strict liability rule are in general contingent on the specifics of the tort problem at hand. In particular, we find that the presence of industry reputation effects can substitute for a suboptimal liability regime and that, in the presence of industry reputation effects, the introduction of the strict liability rule may be detrimental by steering the industry equilibrium away from the socially optimal industry configuration.

The Equivalence of Strict Liability and Negligence Rule: A Trompe L'oeil Perspective

This paper analyzes the difficulties of comparing the respective effectiveness of two among the most important liability regimes in tort law: rule of negligence and strict liability. Starting from the standard Shavellian unilateral accident scheme, I show that matching up liability regime on their capacity to provide the highest level of safety is ineffective. This demonstration lies on two components. The first one gathers some results drawn from literature that introduces uncertainty. The second one takes into consideration the beliefs of agents and their aversion to ambiguity. The model applies uncertainty to the level of maximum damage. This demonstration reinforces the previous result. Hence, both regimes apply on specific tort question and comparing their individual efficiency needs to call for other components as the transaction costs associated to the burden of evidence, the fairness between victims and injurers, etc.

Overcoming Theoretical Indeterminacy

Law and economics has become one of the leading research programs in law. Yet, after four decades it still cannot answer simple questions such as what is the optimal remedy for contract breach. The problem is not limited to contract law. There is also no consensus on other simple questions, such as whether losers should pay winners’ legal fees or whether tort law needs to be reformed. In a widely cited 2003 Yale Law Journal article, Professor Eric Posner argued that economic analysis of contract law has been a failure when it comes to generating clear-cut explanations or policy recommendations. The reason, he argued, is that the theoretical results depend on the values of the parameters. But empirical data are usually not available. The resulting lack of consensus is the main reason why law and economics has had such a small impact on treatises, textbooks, and court decisions. This essay offers a breakthrough to this major problem. I show that most of the indeterminacy in contract scholarship is due to the ‘bad habit’ of trying to solve many problems with a single legal rule. Doing so is problematic for two reasons. First, such a single rule will be a compromise rule, which is not very effective at solving all the problems. Second, choosing the right compromise requires information on the relative social importance of all the problems; such information is nearly impossible to get, and therefore makes the discussion indeterminate. The solution I propose is simple: use a separate rule or doctrine per problem. In practice, this involves using more fault rules and avoiding strict liability or pricing rules. But theoretical scholars should also do what empirical scholars have done for so long—formulate rules of thumb and evidence burdens to get out of indeterminacy. This essay is the first to propose such a rule of thumb for theoretical research: when considering strict liability or pricing rules to solve more than one problem at the same time, discard problems with a social importance of less than 10% of the total. The reason is that loss-sharing strict liability rules can in such cases solve no more than 1% of the total problem. Applying these proposals to contract remedies, I show that determining optimal rules becomes remarkably simple, and that most of the indeterminacy disappears.

Social Network Analysis and the Diffusion of the Strict Liability Rule for Manufacturing Defects, 1963–87

This article reports the results of a study that uses social network analysis to compare the persuasiveness of legal precedents in the diffusion of the strict liability rule for manufacturing defects. This new study tests which legal precedents were most influential and also whether certain state judicial variables influenced the diffusion process. The results are striking. The federal circuit regions appear to define an important reference group in the diffusion process, and social network effects dominate economic and political variables. In addition, the de facto separation of powers in the enactment of new state legislation appears to influence courts' propensities to adopt the strict liability rule. When the executive and legislative branches were controlled by the same political party, regardless of whether it was Republican or Democratic, state courts were more inclined to adopt the strict liability rule.

Equilibrium and Welfare in a Model of Torts with Industry Reputation Effects

We study the problem of torts in a framework where a firm's accident adversely impacts all firms in the industry because of the presence of industry reputation effects. Industry reputation effects lead to interdependence among firms and give rise to strategic firm behavior. We characterize the industry equilibrium and the socially optimal industry configuration in such a setting. We then elucidate how the presence of industry reputation effects and the introduction of a liability regime in the form of a strict liability rule determine whether industry equilibrium is aligned or misaligned with the socially optimal industry configuration. Our results show that both the impact of industry reputation effects and the impact of the strict liability rule are in general contingent on the specifics of the tort problem at hand. In particular, we find that the presence of industry reputation effects can substitute for a suboptimal liability regime and that, in the presence of industry reputation effects, the introduction of the strict liability rule may be detrimental by steering the industry equilibrium away from the socially optimal industry configuration.

Financial Crisis and the Prospects of Global Regulation

Challenges in the sphere of financial regulation created by the global crisis of 2008-2009 are discussed. Advantages of the mechanism based on strict liability rules for deterring economic agents negligent behavior on financial markets are validated. The possibilities for applying the mechanism in the sphere of state regulation are analyzed.

Hazardous Activities and Civil Strict Liability: The Regulator's Dilemma

This paper addresses the conditions for setting up strict civil liability schemes. For that it compares the social efficiency of two main civil liability regimes usually enforced to protect the environment: the strict liability regime and the capped strict liability scheme. First, it shows that the regulator faces an effective dilemma when he has to enforce one of these schemes. This because the social cost of a severe harm (and the associated optimum care effort) is determined independently of any liability regime. This independency has economic consequences. First, victims and polluters pit one against another about the liability regime that the government should enforce. Hence, financially constrained polluters prefer the ceiling of responsibilities while victims wish to extend the amount of redress under a standard strict liability. Economic criteria for enforcing a regime rather than another one are lacking. Second, the paper shows that implementing civil strict liability rules may be done by setting up care standards as for instance in the nuclear or the maritime sectors and demanding to the injurers to comply with them. We show that this goal can be achieved by resorting to some friendly monitoring corresponding to frequent random controls with low fines rather than few controls that should involve heavy fines.

Willingness to Pay, Death, Wealth, and Damages

Willingness to Pay, Death, Wealth and Damages (November 11, 2010) American Law and Economics Review (forthcoming 2011) Ariel Porat & Avraham Tabbach * When people face the risk of death, and when they ascribe no value to their wealth post-death, they over-invest in precautions in order to reduce that risk. There are two main reasons for such over-investment. First, people under risk of death discount their risk-reduction costs by the probability of death following precautions. Second, people facing the risk of death consider the consumption of their wealth when alive to be part of their benefit from risk- reduction. From a social perspective, people's wealth does not cease to exist after death. Therefore, discounting costs by the probability of death and taking into account the benefit of wealth-consumption are socially inefficient. But more interestingly, even from the perspective of the individual facing the risk of death, the investment in risk reduction is only optimal as a second-best alternative. We show that if markets were complete and people could contract with an annuity firm, who would inherit their assets upon death while paying them a sum of money during their lifetimes in accordance with the expected value of the inheritance, such contracts would make those people better off and, more importantly, would align the private and the social incentives to invest in risk reduction. Furthermore, we show how the insights developed in the paper should significantly change the application of Willingness to Pay (WTP) as a criterion for valuing life. In particular, we suggest that the WTP be discounted by the ex-post probability of death and that the value of life be determined irrespective of wealth. Finally, we argue that the results derived from traditional tort models for both unilateral and bilateral accidents should be substantially revised when applied to fatal accidents. In particular, we show that in bilateral accidents, contrary to conventional wisdom, negligence and strict liability rules lead to the same inefficient equilibrium. We also demonstrate how liability rules could be modified to increase efficiency. Ariel Porat is the Alain Poher Professor of Law at Tel Aviv University and Fischel-Neil Distinguished Visiting Professor of Law at the University of Chicago. Avraham Tabbach is Assistant Professor of Law at Tel Aviv University. Special thanks are due to Omri Yadlin, for helping us in developing the ideas underlying this paper, and to Steve Shavell for invaluable comments and suggestions. For very helpful comments and discussions, we thank Benjamin Alarie, Ronen Avraham, Oren Bracha, Omri Ben Shahar, Mira Ganor, Mark Geistfeld, David Gilo, Massimo D’antoni, Sharon Hannes, Alon Harel, Shelly Kreiczer-Levy, Bruce Hay, Saul Levmore, Jacob Nussim, Mitch Polinsky, Eric Posner, Ricky Revesz, Nicholas Quinn Rosenkranz, Ariel Rubinstein, Kathryn Spier, Steve Sugarman, Lior Strahilevitz, Richard Zeckhauser, the participants in workshops at the universities of Bar Ilan, Chicago, Harvard, Siena, Stanford, Texas and Yale, the participants at the Israeli Law and Economics Annual Meeting of 2010, at the NYC Tort Group at New York University, and at the Siena-Toronto-Tel Aviv Workshop in Law and Economics of 2010. Finally, we are grateful to Omer Yehezkel for providing excellent research assistance.

Socially optimal liability rules for firms with natural monopoly in contestable markets

This article considers the problem of socially efficient liability rules for firms in contestable markets where natural monopoly prevails due to decreasing average cost. If the fixed cost that pushes the entry-limiting price above marginal cost is large relative to the level of external harm of firms, the negligence regime is socially superior to the strict liability regime. In the opposite case, the strict liability rule may be socially superior.