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Eliciting Multi-Dimensional Care through Liability and Regulation

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  • Che Yeon-Koo

    (Department of Economics, Columbia University, New York, NY, USA)

Abstract

This paper examines the incentive performance of liability and regulation when a potential injurer can take two types of preventative care, one of which is observed and one of which is not. The problem is studied in a general asymmetric information model, where settlement behavior is endogenous and which incorporates an uncertain legal standard. Contrary to existing literature, we find (1) a shift to a negligence rule may have a perverse effect on unobserved care; (2) uncertainty in legal standards may be socially beneficial as it provides a relatively good incentive for unobserved care; (3) a regulation may not be effective if preventative care efforts are substitutes but is effective if they are complements; (4) an increase in settlement rate may or may not increase the level of care, depending on the cause of the increase; (5) a “decoupling” arrangement with a feature that the defendant pays more than the plaintiff recovers, reduces legal costs and is therefore socially beneficial.

Suggested Citation

  • Che Yeon-Koo, 2016. "Eliciting Multi-Dimensional Care through Liability and Regulation," Asian Journal of Law and Economics, De Gruyter, vol. 7(3), pages 279-303, December.
    • Handle: RePEc:bpj:ajlecn:v:7:y:2016:i:3:p:279-303:n:5
    DOI: 10.1515/ajle-2016-0029
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    References listed on IDEAS

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    1. A. Mitchell Polinsky, 1986. "Detrebling versus Decoupling Antitrust Damages: Lessons from the Theory of Enforcement," NBER Working Papers 1846, National Bureau of Economic Research, Inc.
    2. Steven Shavell, 1984. "A Model of the Optimal Use of Liability and Safety Regulation," RAND Journal of Economics, The RAND Corporation, vol. 15(2), pages 271-280, Summer.
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