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Safety regulation vs. liability with heterogeneous probabilities of suit

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  • Rouillon, Sebastien

Abstract

This article deals with the regulation of activities that entail risk by means of regulatory standard and liability. The original assumption is that the probability that parties might escape liability is variable among the population. The use of each instrument separately is first considered. Under liability, the optimal damages are calculated. From this, it is shown that regulation is superior to liability if harm is not too variable within the population and if the probability of suit is sufficiently variable within the population, and conversely. The use of both instruments at the same time is then analyzed. The optimal combination of a safety standard and a liability schedule is derived. From this, it is proved that a joint use of regulation and liability is always optimal and that the instruments should be designed in a less stringent manner when used jointly.

Suggested Citation

  • Rouillon, Sebastien, 2008. "Safety regulation vs. liability with heterogeneous probabilities of suit," International Review of Law and Economics, Elsevier, vol. 28(2), pages 133-139, June.
    • Handle: RePEc:eee:irlaec:v:28:y:2008:i:2:p:133-139
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    1. Kaplow, Louis & Shavell, Steven, 2002. "Economic analysis of law," Handbook of Public Economics, in: A. J. Auerbach & M. Feldstein (ed.), Handbook of Public Economics, edition 1, volume 3, chapter 25, pages 1661-1784, Elsevier.
    2. Schmitz, Patrick W., 2000. "On the joint use of liability and safety regulation," International Review of Law and Economics, Elsevier, vol. 20(3), pages 371-382, September.
    3. Robert D. Cooter, 1991. "Economic Theories of Legal Liability," Journal of Economic Perspectives, American Economic Association, vol. 5(3), pages 11-30, Summer.
    4. Sébastien ROUILLON, 2008. "Variable Probabilities of Suit and Liability Rules," Cahiers du GREThA (2007-2019) 2008-15, Groupe de Recherche en Economie Théorique et Appliquée (GREThA).
    5. 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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    Cited by:

    1. Friehe, Tim & Langlais, Eric, 2015. "On the political economy of public safety investments," International Review of Law and Economics, Elsevier, vol. 41(C), pages 7-16.
    2. Reinshagen, Felix, 2011. "Standards and Incentives in Safety Regulation," Munich Dissertations in Economics 13430, University of Munich, Department of Economics.
    3. Grajzl, Peter & Baniak, Andrzej, 2009. "Industry self-regulation, subversion of public institutions, and social control of torts," International Review of Law and Economics, Elsevier, vol. 29(4), pages 360-374, December.
    4. Andrzej Baniak & Peter Grajzl, 2016. "Controlling Product Risks when Consumers Are Heterogeneously Overconfident: Producer Liability versus Minimum-Quality-Standard Regulation," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 172(2), pages 274-304, June.
    5. Michel, Stephan & Romano, Alessandro & Zannini, Ugo, 2017. "Joint Use of Liability and Regulation in Environmental Law," ILE Working Paper Series 5, University of Hamburg, Institute of Law and Economics.
    6. Andrzej Baniak & Peter Grajzl, 2014. "Controlling Product Risks when Consumers are Heterogeneously Overconfident: Producer Liability vs. Minimum Quality Standard Regulation," CESifo Working Paper Series 5003, CESifo.

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