Insolvency and Biased Standards - The Case for Proportional Liability
34 Pages Posted: 17 Nov 2009 Last revised: 20 Dec 2009
Date Written: November 17, 2009
We analyze liability rules in a setting where injurers are potentially insolvent and where negligence standards may deviate from the socially optimal level. We show that proportional liability, which sets the measure of damages equal to the harm multiplied by the probability that it was caused by an injurer's negligence, is preferable to other existing negligence-based rules. Moreover, proportional liability outperforms strict liability if the standard of due care is not set too low. Our analysis also suggests that courts should rely on statistical evidence and bar individualized causal claims that link the harm suffered by a plaintiff to the actions of the defendant. Finally, we provide a result which might be useful to regulators when calculating minimum capital requirements or minimum mandatory insurance for different industries.
Keywords: Judgment proof problem, Uncertain causation, Court error and misperception, Proportional liability, Disgorgement
JEL Classification: K13
Suggested Citation: Suggested Citation