Relative Performance of Liability Rules: Experimental Evidence

Vera Angelova, Giuseppe Attanasi and Yolande Hiriart

No 2012-012, Jena Economics Research Papers from Friedrich-Schiller-University Jena

Abstract: We compare the performance of liability rules for managing environmental disasters when third parties are harmed and cannot always be compensated. A firm can invest in safety to reduce the likelihood of accidents. The firm's investment is unobservable to authorities. Externality and asymmetric information call for public intervention to define rules aimed at increasing prevention. We determine the investment in safety under No Liability, Strict Liability and Negligence, and compare it to the first best. Additionally, we investigate how the (dis)ability of the firm to fully cover potential damages affects the firm's behavior. An experiment tests the theoretical predictions. In line with theory, Strict Liability and Negligence are equally effective; both perform better than No Liability; investment in safety is not sensitive to the ability of the firm to compensate potential victims. In contrast with theory, prevention rates absent liability are much higher and liability is much less effective than predicted.

Keywords: Risk Regulation; Liability Rules; Incentives; Insolvency; Experiment (search for similar items in EconPapers)
JEL-codes: D82 K13 K32 Q58 (search for similar items in EconPapers)
Date: 2012-03-30
New Economics Papers: this item is included in nep-cbe, nep-cta, nep-exp and nep-reg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Related works:
Working Paper: Relative performance of liability rules: Experimental evidence (2016)
Journal Article: Relative performance of liability rules: experimental evidence (2014)
Working Paper: Relative Performance of Liability Rules: Experimental Evidence (2013)
Working Paper: Relative Performance of Liability Rules: Experimental Evidence (2012)
Working Paper: Relative Performance of Liability Rules: Experimental Evidence (2012)
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