Optimal negligence rule under limited liability

Juan-José Ganuza and Fernando Gómez

Economics Working Papers from Department of Economics and Business, Universitat Pompeu Fabra

Abstract: We study the standard economic model of unilateral accidents, in its simplest form, assuming that the injurers have limited assets.We identify a second-best optimal rule that selects as due care the minimum of first-best care, and a level of care that takes into account the wealth of the injurer. We show that such a rule in fact maximizes the precautionary effort by a potential injurer. The idea is counterintuitive: Being softer on an injurer, in terms of the required level of care, actually improves the incentives to take care when he is potentially insolvent. We extend the basic result to an entire population of potentially insolvent injurers, and find that the optimal general standards of care do depend on wealth, and distribution of income. We also show the conditions for the result that higher income levels in a given society call for higher levels of care for accidents.

Keywords: Accidents; limited liability and negligence rule (search for similar items in EconPapers)
JEL-codes: H24 K13 K23 L51 (search for similar items in EconPapers)
Date: 2003-03, Revised 2004-05
New Economics Papers: this item is included in nep-law
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Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:upf:upfgen:759

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