The Cost of Delegated Control: Vicarious Liability, Secondary Liability and Mandatory Insurance

Abstract

Vicarious liability, secondary liability and mandatory insurance are three systems to attain judgment-proof or disappearing injurers' precaution through the direct control of a second party (the vicariously liable principal, the secondary liable party, or the insurer). In this way, the legal system delegates control over some injurers to private entities. Such mechanisms generate monitoring costs. In this paper, we consider who bears the cost of such monitoring and the effect thereof on the equilibrium level of precautions under different liability rules. We use these findings to explain some of the patterns in the coupling of substantive standards of liability and legal regimes of delegated control.

Keywords: vicarious liability, secondary liability, insurance, negligence

JEL Classification: K13