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Bilateral Accidents with Intrinsically Interdependent Costs of Precaution

Posted: 15 Sep 2004  

Dhammika Dharmapala

University of Chicago Law School

Sandra A. Hoffmann

Resources for the Future

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Abstract

The standard economic model of bilateral precaution postulates that care taken by injurers and victims affects only expected accident loss. This paper considers situations in which each party's precaution also directly affects the other party's cost of taking precaution. When this additional externality is introduced into a model of unilateral harm, none of the standard tort liability rules induces socially optimal behavior by both parties. Moreover, under a contributory negligence rule, the only equilibrium is in mixed strategies; this gives rise to the possibility of litigation in equilibrium. 'Tort-like' liability rules that can induce socially optimal care by both parties are then characterized. The model is then extended to consider the case of bilateral harm, in which all negligence-based tort rules lead to socially optimal care by both parties, as long as each can sue to recover its full accident losses.

Suggested Citation

Dharmapala, Dhammika and Hoffmann, Sandra A., Bilateral Accidents with Intrinsically Interdependent Costs of Precaution. Journal of Legal Studies, Forthcoming. Available at SSRN: https://ssrn.com/abstract=590346

Dhammika Dharmapala (Contact Author)

University of Chicago Law School ( email )

1111 E. 60th St.
Chicago, IL 60637
United States

Sandra A. Hoffmann

Resources for the Future ( email )

1616 P Street, NW
Washington, DC 20036
United States

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