Risk Aversion, the Hand Rule, and Comparison between Strict Liability and the Negligence Rule

Lee Kangoh ()
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Lee Kangoh: Department of Economics, San Diego State University, 5500 Campanile Drive, San Diego, CA 92182–4485, USA

Review of Law & Economics, 2016, vol. 12, issue 2, 261-274

Abstract: One of the most important propositions in the economics of liability rules states that strict liability and the negligence rule are equivalent and first-best efficient if the standard of due care is set according to the Hand rule. This proposition hinges on the assumption that individuals are risk neutral. This paper considers this proposition with risk-averse individuals, and demonstrates that the proposition does not extend. In particular, the two liability rules are not equivalent, and the analysis compares the two liability rules in terms of utilitarian social welfare.

Keywords: risk aversion; Hand rule; strict liability; negligence rule; social welfare (search for similar items in EconPapers)
JEL-codes: G22 K13 (search for similar items in EconPapers)
Date: 2016
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DOI: 10.1515/rle-2015-0016

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