Risk Aversion, Liability Rules, and Safety

35 Pages Posted: 16 May 2003

See all articles by Joshua Graff Zivin

Joshua Graff Zivin

Columbia University - Department of Health Policy and Management; National Bureau of Economic Research (NBER)

Richard E. Just

University of Maryland - Department of Agricultural & Resource Economics

David Zilberman

University of California, Berkeley - Department of Agricultural & Resource Economics

Date Written: May 2003

Abstract

This paper investigates the performance of liability rules in two-party stochastic externality problems where negotiations are feasible and side payments are based on the realized level of externalities. Results show that an increase in polluter liability does not necessarily increase safety or efficiency in cases where the polluter is risk neutral. Complete polluter liability is found to yield Pareto optimality. When either party is risk averse, an increase in polluter liability may sometimes reduce safety and efficiency. If the polluter is risk neutral and the victim is risk averse, Pareto optimality is only achieved by assigning full liability on the polluter, i.e. giving the victim complete property rights to a clean environment. If the polluter is risk averse and the victim is risk neutral, no level of polluter liability is optimal. In this case, optimality can only be achieved through a contract on abatement activities, such that the risk-averse polluter receives a guaranteed payment regardless of the stochastic outcome.

Suggested Citation

Zivin, Joshua Graff and Just, Richard E. and Zilberman, David, Risk Aversion, Liability Rules, and Safety (May 2003). NBER Working Paper No. w9678. Available at SSRN: https://ssrn.com/abstract=406050

Joshua Graff Zivin (Contact Author)

Columbia University - Department of Health Policy and Management ( email )

600 West 168th Street, 6th Floor
New York, NY 10032
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Richard E. Just

University of Maryland - Department of Agricultural & Resource Economics ( email )

Symmons Hall, Rm 2200
University of Maryland
College Park, MD 20742-5535
United States
301-405-1289 (Phone)

David Zilberman

University of California, Berkeley - Department of Agricultural & Resource Economics ( email )

Berkeley, CA 94720
United States

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