When Will Judgment Proof Injurers Take Too Much Precaution?
University of Amsterdam - Amsterdam Center for Law & Economics (ACLE); Tinbergen Institute
Gerrit De Geest
Washington University in Saint Louis - School of Law
International Review of Law and Economics, Vol. 26, No. 3, September 2006
George Mason Law & Economics Research Paper No. 03-56
This article identifies the conditions under which potentially insolvent injurers over-invest in precaution. We show that this may happen only with respect to precautionary measures that reduce the probability of the accident. No such result occurs if precaution only reduces the magnitude of the harm. Contrary to the literature, we find that overprecaution may also occur when precaution is non-monetary. The reason is that overprecaution can be due not only to the implicit precaution-subsidy effect (the fact that care-taking reduces the injurer's exposure to liability when precaution is monetary) but also to a substitution effect between precaution that reduces the probability of accidents and precaution that reduces the magnitude of the harm. Finally, we find that when the injurer's wealth is sufficiently low, precautions may actually be lower when they are monetary than when they are non-monetary, despite the implicit precaution subsidy in the former case.
Number of Pages in PDF File: 12
Keywords: insolvency, judgment proof problem, liability, bankruptcy, overprecaution
JEL Classification: K13, K32
Date posted: December 11, 2003