A Unilateral Accident Model Under Ambiguity

Abstract:     
Standard accident models are based on the expected utility framework and represent agents' beliefs about accident risk with a probability distribution. Consequently, they do not allow for Knightian uncertainty, or ambiguity, with respect to accident risk and cannot accommodate optimism (ambiguity loving) or pessimism (ambiguity aversion). This paper presents a unilateral accident model under ambiguity. To incorporate ambiguity, I adopt the Choquet expected utility framework and represent the injurer's beliefs with a neo-additive capacity. I show that neither strict liability nor negligence is generally efficient in the presence of ambiguity. In addition, I generally find that the injurer's level of care decreases (increases) with ambiguity if he is optimistic (pessimistic) and decreases (increases) with his degree of optimism (pessimism). The results suggest that negligence is more robust to ambiguity and, therefore, may be superior to strict liability in unilateral accident cases. Finally, I design an efficient ambiguity adjusted liability rule.

Number of Pages in PDF File: 47

Keywords: accidents, ambiguity, Choquet expected utility, Knightian uncertainty, neoadditive capacity, optimism, pessimism, tort law

JEL Classification: D81, K13

Accepted Paper Series