Two Advantages of the Negligence Rule Over Strict Liability When the Parties Are Risk Averse
16 Pages Posted: 21 Aug 2019
Date Written: July 12, 2019
When parties are risk-averse and take out insurance, the efficiency of alternative tort rules depends on the efficiency of the insurance contracts. This article addresses two advantages of the negligence rule over the rule of strict liability in this common scenario. One is the well-known advantage that standards may have over rules. Even when the act actually performed by the injurer is equally verifiable under the two rules, such that the insurer can condition coverage on it, such contingent contracts are in fact costly, sometimes prohibitively costly, to write. By contrast, it may be clear ex-post when a negligent act has been performed. The other is that the victim may more easily be incentivized to bring forward information about the injurer's acts under the rule of negligence than under the rule of strict liability where details of the injurer's act can be immaterial for the victim's claim. The article demonstrates these two advantages and discussed the arguments that can be raised against them.
Keywords: Insurance contract, Efficiency, Negligence rule, Strict liability
JEL Classification: D86, K12, K13, K19
Suggested Citation: Suggested Citation