Eliciting Multi-Dimensional Care through Liability and Regulation

Yeon-Koo Che

Asian Journal of Law and Economics, 2016, vol. 7, issue 3, 279-303

Abstract: This paper examines the incentive performance of liability and regulation when a potential injurer can take two types of preventative care, one of which is observed and one of which is not. The problem is studied in a general asymmetric information model, where settlement behavior is endogenous and which incorporates an uncertain legal standard. Contrary to existing literature, we find (1) a shift to a negligence rule may have a perverse effect on unobserved care; (2) uncertainty in legal standards may be socially beneficial as it provides a relatively good incentive for unobserved care; (3) a regulation may not be effective if preventative care efforts are substitutes but is effective if they are complements; (4) an increase in settlement rate may or may not increase the level of care, depending on the cause of the increase; (5) a “decoupling” arrangement with a feature that the defendant pays more than the plaintiff recovers, reduces legal costs and is therefore socially beneficial.

Keywords: liability; preventative care; regulation (search for similar items in EconPapers)
Date: 2016
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DOI: 10.1515/ajle-2016-0029

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