Optimal Negligence Rule Under Limited Liability

UPF Working Paper No. 759

32 Pages Posted: 12 Jul 2004

See all articles by Juan-José Ganuza

Juan-José Ganuza

Universitat Pompeu Fabra - Faculty of Economic and Business Sciences

Fernando Gomez-Pomar

Universitat Pompeu Fabra

Date Written: May 2004

Abstract

We study the standard economic model of unilateral accidents, in its simplest form, assuming that the injurers have limited assets. We identify a second-best optimal rule that selects as due care the minimum of first-best care, and a level of care that takes into account the wealth of the injurer. We show that such a rule in fact maximizes the precautionary effort by a potential injurer. The idea is counterintuitive: Being softer on an injurer, in terms of the required level of care, actually improves the incentives to take care when he is potentially insolvent. We extend the basic result to an entire population of potentially insolvent injurers, and find that the optimal general standards of care do depend on wealth, and distribution of income. We also show the conditions for the result that higher income levels in a given society call for higher levels of care for accidents.

Keywords: Accidents, limited liability and negligence rule

JEL Classification: K13, K23, L51, H24

Suggested Citation

Ganuza, Juan and Gomez-Pomar, Fernando, Optimal Negligence Rule Under Limited Liability (May 2004). UPF Working Paper No. 759, Available at SSRN: https://ssrn.com/abstract=563849 or http://dx.doi.org/10.2139/ssrn.563849

Juan Ganuza (Contact Author)

Universitat Pompeu Fabra - Faculty of Economic and Business Sciences ( email )

Ramon Trias Fargas 25-27
Barcelona, 08005
Spain
(34-93) 542 27 19 (Phone)
(34-98) 542 17 46 (Fax)

Fernando Gomez-Pomar

Universitat Pompeu Fabra ( email )

Ramon Trias Fargas 25-27
08005 Barcelona
Spain
(34-93) 542 16 47 (Phone)
(34-93) 542 17 31 (Fax)

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