Economic Analysis of Accident Law: A New Liability Rule that Induces Socially Optimal Behaviour in Case of Limited Information

Srivastava Astha () and Srivastava Ankur ()
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Srivastava Astha: ICFAI Law School, Hyderabad, India
Srivastava Ankur: Government of India, Hyderabad, India

Review of Law & Economics, 2021, vol. 17, issue 1, 119-131

Abstract: In accident law, we seek a liability rule that will induce both the parties to adopt socially optimal levels of precaution. Economic analysis, however, shows that none of the commonly used liability rules induce both parties to adopt optimal levels, if courts have access only to ‘Limited Information’ on. In such a case, it has also been established (K. (2006). Efficiency of liability rules: a reconsideration. J. Int. Trade Econ. Dev. 15: 359–373) that no liability rule based on cost justified untaken precaution as a standard of care can be efficient. In this paper, we describe a two-step liability rule: the rule of negligence with the defence of relative negligence. We prove that this rule has a unique Nash equilibrium at socially optimal levels of care for the non-cooperative game, and therefore induces both parties to adopt socially optimal behaviour even in case of limited information.

Keywords: Tort law; economic analysis of law; liability rules; Hand’s rule; limited information (search for similar items in EconPapers)
Date: 2021
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DOI: 10.1515/rle-2019-0049

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