Informational Properties of Liability Regimes

Abstract

Fault-based liability regimes require an inquiry into the nature of the defendant's conduct that is absent in strict liability regimes. Therefore, verdicts reached through fault-based liability can convey superior information compared to verdicts under strict liability. Further reflection reveals that this advantage is enjoyed by fault-based liability regimes only if the evidence related to the nature of defendants' actions is sufficiently informative. Otherwise, relying on such evidence can add noise to the information conveyed through verdicts. Thus, liability regimes affect the information conveyed to third parties, which, in turn, causes deterrence effects by affecting the informal sanctions imposed on defendants found liable. We construct a model wherein this function is formalized and we identify the optimal liability regime and burden of proof as a function of various factors, e.g., the commonness of the harmful act and the informativeness of the evidence. The presence of reputational sanctions reduces the social desirability of using strict liability in the typical case where imposing liability is not the norm.

Keywords: Informal sanctions, reputational sanctions, fault-based liability, strict liability, burden of proof.