Social Wealth and Optimal Care
36 Pages Posted: 29 Jun 2008 Last revised: 26 Feb 2012
Date Written: September 3, 2009
When accidents result in noncompensable losses, a monetary payment is not enough to compensate the victim. We study the characteristics of optimal levels of care and distribution of risk under these circumstances and show that care depends on the aggregate wealth of society but does not depend on wealth distribution. We then examine whether ordinary liability rules, regulation, insurance, taxes and subsidies can be used to implement the first-best outcome (in terms of both care and risk). Finally, our results are discussed in the light of fairness considerations (second best) and in the special case of accidents between individuals and a firm.
Keywords: accidents, risk, wealth, care, bodily injury
JEL Classification: K13
Suggested Citation: Suggested Citation