A Neglected Interdependency in Liability Theory

The standard economic model of bilateral precaution concludes that (in the absence of uncertainty, misperception, or error) all negligence-based liability rules induce socially optimal behavior by both injurers and victims. This paper generalizes the standard model to consider situations in which one party’s precaution affects not only expected accident loss, but also directly affects the other party’s effort—or cost—of taking precaution. If the injurer’s care affects the victim’s precaution costs (but not vice versa), most of the standard results continue to hold (except for strict liability with a defense of contributory negligence). If the victim’s precaution affects the injurer’s costs of care (but not vice versa), only strict liability with a defense of contributory negligence leads to the social optimum, while the other negligence-based rules lead to suboptimal outcomes. In the general case (where each party’s costs depend on both parties’ levels of precaution), none of the standard liability rules induce socially optimal behavior in both parties. The paper’s other main result concerns the possibility of self-interested, negligent behavior in equilibrium. Under negligence with a defense of contributory negligence, the only equilibrium is in the mixed strategies of both injurer and victim. This involves the parties choosing (with strictly positive probability) to behave negligently, and gives rise to the possibility of successful litigation in equilibrium, even though there is no uncertainty, misperception, or error. The paper concludes by considering the implications of these results for the design of liability rules.