A Model of the Socially Optimal Use of Liability and Regulation

56 Pages Posted: 1 Feb 2001 Last revised: 17 Apr 2008

See all articles by Steven Shavell

Steven Shavell

Harvard Law School; National Bureau of Economic Research (NBER)

Date Written: October 1983

Abstract

Liability and safety regulation are examined as means of controlling risks in a theoretical model of the occurrence of accidents. According to the model, regulation does not result in appropriate reduction of risk -- due to the regulator's lack of knowledge about risk -- nor does liability result in that outcome -- because the incentives it creates are diluted by the chance that parties would not be sued for harm done or would not be able to pay fully for it. Thus, either liability could turn out to be superior to regulation or the reverse could be true. But as is stressed, joint use of the two means of controlling risk is generally socially advantageous, and the characteristics of their optimal joint use are determined.

Suggested Citation

Shavell, Steven, A Model of the Socially Optimal Use of Liability and Regulation (October 1983). NBER Working Paper No. w1220. Available at SSRN: https://ssrn.com/abstract=227546

Steven Shavell (Contact Author)

Harvard Law School ( email )

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National Bureau of Economic Research (NBER)

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