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Realistic Standards: Optimal Negligence with Limited Liability

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  • Juan José Ganuza
  • Fernando Gómez

Abstract

We study the standard economic model of unilateral accidents under the assumption that the injurers have limited assets. We identify a second-best optimal rule that selects as due care the minimum of first-best care and a level of care that takes into account the wealth of the injurer. We show that such a rule in fact maximizes the precautionary effort by a potential injurer. The idea is counterintuitive: being softer on an injurer, in terms of the required level of care, actually improves the incentives when he or she is potentially insolvent. We extend the basic result to an entire population of potentially insolvent injurers and find that the optimal general standards of care do depend on wealth and the distribution of income. We also show that, under certain conditions, wealthier populations should be subject to higher general standards of care in the case of accidents. (c) 2008 by The University of Chicago. All rights reserved.

Suggested Citation

  • Juan José Ganuza & Fernando Gómez, 2008. "Realistic Standards: Optimal Negligence with Limited Liability," The Journal of Legal Studies, University of Chicago Press, vol. 37(2), pages 577-594, June.
    • Handle: RePEc:ucp:jlstud:v:37:y:2008:i:2:p:577-594
    DOI: 10.1086/586718
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    References listed on IDEAS

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    Cited by:

    1. Dari-Mattiacci, Giuseppe & Langlais, Eric, 2012. "Social Wealth and Optimal Care," International Review of Law and Economics, Elsevier, vol. 32(2), pages 271-284.
    2. Stremitzer, Alexander & Tabbach, Avraham, 2009. "Insolvency and Biased Standards - The Case for Proportional Liability," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 289, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
    3. Kim, Chulyoung & Koh, Paul S., 2019. "Minimum Asset and Liability Insurance Requirements on Judgment-Proof Individuals When Harm is Endogenous," Hitotsubashi Journal of Economics, Hitotsubashi University, vol. 60(2), pages 141-161, December.
    4. Stremitzer Alexander & Tabbach Avraham D., 2014. "The Robustness Case for Proportional Liability," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 14(1), pages 371-395, January.
    5. Polborn, Mattias K., 2023. "Incentives for investments in defensive technology: An economic analysis of the Safety Act," International Review of Law and Economics, Elsevier, vol. 73(C).
    6. Friehe, Tim, 2009. "Precaution v. avoidance: A comparison of liability rules," Economics Letters, Elsevier, vol. 105(3), pages 214-216, December.
    7. Farmer, Amy & Pecorino, Paul, 2017. "Litigation with judgment proof defendants," International Review of Law and Economics, Elsevier, vol. 49(C), pages 1-9.
    8. Juan José Ganuza & Fernando Gomez, 2011. "Soft Negligence Standards and the Strategic Choice of Firm Size," The Journal of Legal Studies, University of Chicago Press, vol. 40(2), pages 439-466.
    9. Baniak Andrzej & Grajzl Peter, 2011. "Interjurisdictional Linkages and the Scope for Interventionist Legal Harmonization," Review of Law & Economics, De Gruyter, vol. 7(2), pages 405-434, December.
    10. Arbel, Yonathan A., 2016. "Shielding of assets and lending contracts," International Review of Law and Economics, Elsevier, vol. 48(C), pages 26-35.
    11. Giuseppe Dari‐Mattiacci & Barbara M. Mangan, 2008. "Disappearing Defendants versus Judgment‐Proof Injurers," Economica, London School of Economics and Political Science, vol. 75(300), pages 749-765, November.
    12. Loeper, Antoine, 2011. "Coordination in heterogeneous federal systems," Journal of Public Economics, Elsevier, vol. 95(7-8), pages 900-912, August.
    13. Barbara Luppi & Francesco Parisi, 2016. "Optimal liability for optimistic tortfeasors," European Journal of Law and Economics, Springer, vol. 41(3), pages 559-574, June.

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