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Equilibrium and Welfare in a Model of Torts with Industry Reputation Effects

Review of Law & Economics, Vol. 9, Issue 2, pp. 265–302, 2013

Posted: 26 Nov 2013  

Andrzej Baniak

Central European University (CEU) - Department of Economics

Peter Grajzl

Washington and Lee University - Department of Economics; CESifo

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Date Written: October 29, 2013

Abstract

We study the problem of torts in a framework where a firm’s accident adversely impacts all firms in the industry because of the presence of industry reputation effects. Industry reputation effects lead to interdependence among firms and give rise to strategic firm behavior. We characterize the industry equilibrium and the socially optimal industry configuration in such a setting. We then elucidate how the presence of industry reputation effects and the introduction of a liability regime in the form of a strict liability rule determine whether industry equilibrium is aligned or misaligned with the socially optimal industry configuration. Our results show that both the impact of industry reputation effects and the impact of the strict liability rule are in general contingent on the specifics of the tort problem at hand. In particular, we find that the presence of industry reputation effects can substitute for a suboptimal liability regime and that, in the presence of industry reputation effects, the introduction of the strict liability rule may be detrimental by steering the industry equilibrium away from the socially optimal industry configuration.

Keywords: industry reputation effects, torts, industry equilibrium, social welfare, strict liability

JEL Classification: K13, L14, D60

Suggested Citation

Baniak, Andrzej and Grajzl, Peter, Equilibrium and Welfare in a Model of Torts with Industry Reputation Effects (October 29, 2013). Review of Law & Economics, Vol. 9, Issue 2, pp. 265–302, 2013. Available at SSRN: https://ssrn.com/abstract=2359675

Andrzej Baniak

Central European University (CEU) - Department of Economics ( email )

Nador u. 9.
Budapest H-1051
Hungary
(36) 1 327-3231 (Phone)
(36) 1 327-3232 (Fax)

Peter Grajzl (Contact Author)

Washington and Lee University - Department of Economics ( email )

Lexington, VA 24450
United States

HOME PAGE: http://home.wlu.edu/~grajzlp/

CESifo ( email )

Poschinger Str. 5
Munich, DE-81679
Germany

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