Optimal Liability Design Under Risk and Ambiguity

Quaderni - Working Paper DSE N° 1048

38 Pages Posted: 11 Jan 2016 Last revised: 29 Sep 2017

Date Written: November 24, 2015

Abstract

This paper develops an original mean-variance model able to capture the disposition of the parties towards both standard risk and ambiguity. Ambiguity arises when the causal link between conduct and harm is not univocal, as is frequently the case with toxic torts. Risk aversion and ambiguity aversion tend to have a similar impact on optimal liability rules if greater care reduces the ambiguity perceived by the parties, i.e. if safety and predictability go hand in hand. Strict liability dominates negligence when the injurer has lower degrees of risk and ambiguity aversion than the victim and can formulate less ambiguous estimates of the probability of harm. The reverse result only holds under stronger conditions.

* A revised version of this paper has been published in the American Law and Economics Review under the title: "Liability law under scientific uncertainty"

Keywords: negligence vs. strict liability, scienti c uncertainty, ambiguity, toxic torts

JEL Classification: K13

Suggested Citation

Franzoni, Luigi Alberto, Optimal Liability Design Under Risk and Ambiguity (November 24, 2015). Quaderni - Working Paper DSE N° 1048, Available at SSRN: https://ssrn.com/abstract=2713738 or http://dx.doi.org/10.2139/ssrn.2713738

Luigi Alberto Franzoni (Contact Author)

University of Bologna ( email )

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Bologna, 40124
Italy
0512098488 (Phone)
+39-051-221968 (Fax)

HOME PAGE: https://www.unibo.it/sitoweb/luigi.franzoni/en

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