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Negligence rules coping with hidden precaution

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  • Schweizer, Urs

Abstract

This paper investigates the implementation of negligence rules when the negligent act constitutes a hidden action in the sense of principal–agent theory and where the available evidence is generated by a signal. Any liability rule exclusively based on the available evidence comes with an incentive threshold. Agents with cost savings from the negligent act above this threshold commit the negligent act whereas the others do not. In a first step, liability rules are examined that implement a given incentive threshold at minimum error costs. As this is a linear programming problem, the present paper makes heavy use of duality theory. The multiplier of the incentive constraint if understood as shadow price allows for an intuitive explanation of the results. As a second step, a comparative statics analysis with respect to the incentive threshold is provided. Surprisingly enough, the relation between the threshold and minimum error costs need not be monotonic.

Suggested Citation

  • Schweizer, Urs, 2022. "Negligence rules coping with hidden precaution," Mathematical Social Sciences, Elsevier, vol. 119(C), pages 108-117.
    • Handle: RePEc:eee:matsoc:v:119:y:2022:i:c:p:108-117
    DOI: 10.1016/j.mathsocsci.2022.07.002
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    References listed on IDEAS

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    1. Demougin, Dominique & Fluet, Claude, 2006. "Preponderance of evidence," European Economic Review, Elsevier, vol. 50(4), pages 963-976, May.
    2. Dominique Demougin & Claude Fluet, 2005. "Deterrence versus Judicial Error: A Comparative View of Standards of Proof," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 161(2), pages 193-206, June.
    3. Dominique Demougin & Claude Fluet, 2008. "Rules of proof, courts, and incentives," RAND Journal of Economics, RAND Corporation, vol. 39(1), pages 20-40, March.
    4. Juan José Ganuza & Fernando Gomez & Jose Penalva, 2022. "Quality of Evidence and Legal Decision-Making," American Law and Economics Review, American Law and Economics Association, vol. 24(1), pages 327-368.
    5. Hay, Bruce L & Spier, Kathryn E, 1997. "Burdens of Proof in Civil Litigation: An Economic Perspective," The Journal of Legal Studies, University of Chicago Press, vol. 26(2), pages 413-431, June.
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