Status and Liability

We analyze liability law when the value of the good at risk has an influence on the consumer´s social status. It is first established that standard liability rules fail to induce efficient choices. We argue that standard negligence will tend to outperform standard strict liability. Next, we suggest welfare-improving adjustments to strict liability and negligence. An optimally adjusted strict liability rule will require that damages decrease in the level of harm, and thereby ensures first-best choices. Under negligence, the second-best due-care standard should be set below the level of care that minimizes the sum of care and expected harm.