Settlement and the Strict Liability-Negligence Comparison
29 Pages Posted: 7 Sep 2011
Date Written: September 7, 2011
Because injurers typically have better information about their level of care than do victims, the negligence rule increases the degree of asymmetric information between the parties, impeding settlement. Furthermore, the defendant’s private information about its level of care creates a mixed-strategy equilibrium under the negligence rule in both a screening and a signaling model of settlement. This paper shows that, as a result, expected accident costs are strictly greater under negligence than strict liability unless the injurer is sufficiently judgement-proof. That is, expected accident costs are lower under strict liability if the defendant is only somewhat judgement proof, while negligence has lower expected accident costs if the defendant is very judgement proof.
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