No-Fault for Motor Vehicles: An Economic Analysis
University of Michigan Law School, Working Paper No. 99-016
38 Pages Posted: 24 Aug 1999
Date Written: June 1999
Fifteen states in the U.S., one province in Canada, two provinces in Australia, and New Zealand have adopted no-fault systems to partially or completely replace the tort system in cases involving traffic accidents. Under the traditional tort system, accident victims have the right to collect partial or full compensation for their damage from injurers if a court finds that injurers were negligent. In contrast under a no-fault regime, injurers are never liable for victims? damage. Instead, all drivers are required to purchase insurance and victims collect compensation for their damage from their own insurance companies, rather than from the injurer or the injurer's insurance company.
In this paper we compare incentives and efficiency under the tort system (the comparative negligence rule) versus the no-fault system. We concentrate on no-fault as a liability rule rather than an insurance system and we analyze both pure no-fault and mixed no-fault systems that allow victims to opt out of no-fault and sue injurers if victims' damage exceeds a threshold level. Our main results are the following: (1) Under pure no-fault, drivers have an incentive to use either the economically efficient level of care or less, but never more. (2) The mixed no-fault system with a zero threshold for opt-out is identical to the pure tort system in terms of drivers' incentives to use care and to file lawsuits. Similarly, the mixed no-fault system with an infinite threshold is identical to the pure no-fault system. In between, the mixed no-fault system with an intermediate threshold level gives drivers different incentives than either of the pure systems. (3) No single system always dominates the others on efficiency grounds; but the simulation results show that pure no fault and the mixed no-fault system with a high threshold for opting out are preferred under the widest range of parameter values.
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