The Efficiency of (strict) Liability Rules revised in Risk and Ambiguity

Nicolas Lampach and Sandrine Spaeter

Working Papers of BETA from Bureau d'Economie Théorique et Appliquée, UDS, Strasbourg

Abstract: In this paper we revise the results about the efficiency of (strict) unlimited, then limited liability in inducing optimal investment in prevention by injurers. Risk and ambiguity are considered. We assume that the potential injurer whose activities cause a risk of environmental accident can reduce the probability of accident by investing in prevention. In the risky model, we recover that limited liability does not always induce low prevention. Contrary to the arguments enhanced by Beard (1990) and Lipowski-Posey (1993), outside lending, absent from our model, does not explain this result. In the ambiguous context, we implement the Non-Extreme Outcome (NEO) expected utility model (Chateauneuf et al., 2007) to represent the injurer’s beliefs and decisions. When ambiguity matters and prevention also affects the injurer’s subjective beliefs, none of the results with risk hold. In particular, the injurer can overinvest in prevention under both unlimited and limited liability.

Keywords: Strict liability; Ambiguity; Optimal Care; Optimism; Subjective Beliefs. (search for similar items in EconPapers)
JEL-codes: D29 D81 K0 K32 (search for similar items in EconPapers)
Date: 2016
New Economics Papers: this item is included in nep-law, nep-mic and nep-upt
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

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Persistent link: https://EconPapers.repec.org/RePEc:ulp:sbbeta:2016-29

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