12 Pages Posted: 11 Dec 2003
Date Written: December 2003
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.
Keywords: insolvency, judgment proof problem, liability, bankruptcy, overprecaution
JEL Classification: K13, K32
Suggested Citation: Suggested Citation
Dari‐Mattiacci, Giuseppe and De Geest, Gerrit, When Will Judgment Proof Injurers Take Too Much Precaution? (December 2003). International Review of Law and Economics, Vol. 26, No. 3, September 2006; George Mason Law & Economics Research Paper No. 03-56. Available at SSRN: https://ssrn.com/abstract=477042 or http://dx.doi.org/10.2139/ssrn.477042