Risk Aversion, Liability Rules, and Safety

Joshua Graff Zivin, Richard Just and David Zilberman

No 9678, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: This paper investigates the performance of liability rules in two-party stochastic externality problems where negotiations are feasible and side payments are based on the realized level of externalities. Results show that an increase in polluter liability does not necessarily increase safety or efficiency in cases where the polluter is risk neutral. Complete polluter liability is found to yield Pareto optimality. When either party is risk averse, an increase in polluter liability may sometimes reduce safety and efficiency. If the polluter is risk neutral and the victim is risk averse, Pareto optimality is only achieved by assigning full liability on the polluter, i.e. giving the victim complete property rights to a clean environment. If the polluter is risk averse and the victim is risk neutral, no level of polluter liability is optimal. In this case, optimality can only be achieved through a contract on abatement activities, such that the risk-averse polluter receives a guaranteed payment regardless of the stochastic outcome.

JEL-codes: D8 K0 (search for similar items in EconPapers)
Date: 2003-05
New Economics Papers: this item is included in nep-law
Note: ED EEE
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

Published as Zivin, Joshua Graff & Just, Richard E. & Zilberman, David, 2005. "Risk Aversion, Liability Rules, and Safety," International Review of Law and Economics, Elsevier, vol. 25(4), pages 604-623, December.

Downloads: (external link)
http://www.nber.org/papers/w9678.pdf (application/pdf)

Related works:
Journal Article: Risk Aversion, Liability Rules, and Safety (2005)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:nbr:nberwo:9678

Ordering information: This working paper can be ordered from
http://www.nber.org/papers/w9678

Access Statistics for this paper

More papers in NBER Working Papers from National Bureau of Economic Research, Inc National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.. Contact information at EDIRC.
Bibliographic data for series maintained by ().