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Efficient liability law when parties genuinely disagree

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  • Luigi Alberto Franzoni

Abstract

This article compares the classic liability rules, negligence, and strict liability, under the hypothesis that injurers and victims formulate subjective beliefs about the probabilities of harm. Parties may reasonably disagree in their assessment of the precautionary measures available: a measure regarded as safe by one party may be regarded as not safe by the other. By relying on the notions of Pareto efficiency and “No Betting” Pareto efficiency, the article shows that negligence is the optimal liability rule when injurers believe that the probability of harm is always higher than the victims do, while strict liability with overcompensatory damages is the optimal rule in the opposite case. The same results apply to bilateral accidents and, specifically, to product-related harms in competitive markets. Overcompensatory (“punitive”) damages provide consumers with insurance against their own pessimism. (JEL K13, D83, D62)

Suggested Citation

  • Luigi Alberto Franzoni, 2024. "Efficient liability law when parties genuinely disagree," The Journal of Law, Economics, and Organization, Oxford University Press, vol. 40(2), pages 416-433.
    • Handle: RePEc:oup:jleorg:v:40:y:2024:i:2:p:416-433.
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    File URL: http://hdl.handle.net/10.1093/jleo/ewac022
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    More about this item

    JEL classification:

    • K13 - Law and Economics - - Basic Areas of Law - - - Tort Law and Product Liability; Forensic Economics
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • D62 - Microeconomics - - Welfare Economics - - - Externalities

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