Informational Properties of Liability Regimes

Fault-based liability regimes require an inquiry into the nature of the defendant’s conduct that is absent in strict liability regimes. Therefore, fault-based liability can convey superior information compared to strict liability. Further reflection reveals that this is true only if the evidence related to the nature of defendants’ actions is sufficiently informative. Otherwise, such evidence can add noise to the information conveyed through judgments. Thus, liability regimes affect the information conveyed to third parties, which, in turn, causes deterrence effects through informal sanctions imposed on defendants found liable. We formalize this function of liability regimes and identify the optimal liability regime and burden of proof as a function of various factors, for example, the commonness of liability and the informativeness of the evidence. The presence of reputational sanctions reduces the social desirability of using strict liability in the typical case in which imposing liability is not the norm.