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On the Choice of Liability Rules

Author

Listed:
  • Kundu Rajendra P.

    (Centre for Economic Studies and Planning, School of Social Sciences, Jawaharlal Nehru University, New Delhi, 110067, India)

  • Pal Debabrata

    (Centre for Economic Studies and Planning, School of Social Sciences, Jawaharlal Nehru University, New Delhi, 110067, India)

Abstract
Legal assignment of liabilities for losses arising out of interactions involving negative externalities usually depend on which of the interacting parties are negligent and which are not. It has been established in the literature that, if negligence is defined as failure to take some cost-justified precaution then there is no liability rule which can always lead to an efficient outcome. The objective of this paper is to try and understand if it is still possible to make pairwise comparisons between rules on the basis of efficiency and to use such a method to explain/evaluate choices from a given set of rules. We focus on a set of five of the most widely analyzed rules (no liability, strict liability, negligence, negligence with the defense of contributory negligence and strict liability with the defense of contributory negligence), and use a binary relation according to which a rule in the set is considered to be at least as efficient as another if and only if the set of applications for which it is inefficient is a subset of the set of applications for which the other one is inefficient. We show that, with respect to the above mentioned relation, pairwise comparisons between rules in this set fail. The paper, thus, demonstrates that an efficiency based explanation for any choice from these five rules is not consistent with the notion of negligence defined as failure to take some cost-justified precaution.

Suggested Citation

  • Kundu Rajendra P. & Pal Debabrata, 2021. "On the Choice of Liability Rules," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 21(1), pages 1-18, January.
    • Handle: RePEc:bpj:bejtec:v:21:y:2021:i:1:p:1-18:n:6
    DOI: 10.1515/bejte-2019-0160
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    More about this item

    Keywords

    liability rule; simple liability rule; negligence; cost-justified untaken precaution; Nash equilibrium; efficiency;
    All these keywords.

    JEL classification:

    • K13 - Law and Economics - - Basic Areas of Law - - - Tort Law and Product Liability; Forensic Economics
    • K40 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior - - - General
    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • D60 - Microeconomics - - Welfare Economics - - - General
    • D62 - Microeconomics - - Welfare Economics - - - Externalities

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