Efficiency of liability rules: A reconsideration

Abstract

In the mainstream of law and economics the notion of negligence is defined as the failure to take at least the legally specified due care level. In the standard tort model, with this notion of negligence, the efficient liability rules are characterized by the condition of negligence liability, which requires that if one party is negligent and the other non-negligent then the entire accident loss must be borne by the negligent party. This paper is concerned with the question of efficiency of liability rules when the notion of negligence is defined as failure to take some cost-justified precaution. The main result of the paper shows that there does not exist any liability rule which is efficient when negligence is identified by the existence of some cost-justified untaken precaution.

Key words:

• Liability rules
• efficient liability rules
• notion of negligence
• untaken precaution
• negligence rule

Acknowledgement

The author wishes to thank Sugato Dasgupta, Rajendra Kundu, Taposik Banerjee, Papiya Ghosh, Anirban Mitra and two referees for helpful comments.

Notes

¹ This view has been most consistently, and cogently, articulated by Grady (1983, 1984, 1989).

² In addition to denoting the set {x| 0 ≤ x ≤ 1} by [0, 1], we denote by [0, 1) the set {x| 0 ≤ x < 1}.

³ To define proportions of negligence and non-negligence the way they have been defined here seems to be an appropriate way to do so in a framework where negligence is determined on the basis of existence of some cost-justified untaken precaution. It should, however, be noted that there are other plausible ways of defining proportions of negligence and non-negligence. For the impossibility result of this paper, the particular way in which proportions of negligence and non-negligence have been defined here, is not crucial.

⁴ Throughout this paper we consider only pure-strategy Nash equilibria.

⁵ It should be noted that as x* ∈ (0, 1], it follows that t > 1.

⁶ This can always be done. ε ₁ = ε ₂ = 4, ε ₃ = ε ₄ = 2, ε ₅ = 3, θ ₁ = θ ₂ = 3, ε = 5, provides a simple example.