47 Pages Posted: 31 Oct 2005
Date Written: October 2005
This paper analyzes the normative role for civil liability in aligning terrorism precaution incentives, when the perpetrators of terrorism are unreachable by courts or regulators. We consider the strategic interaction among targets, subsidiary victims, and terrorists within a sequential, game-theoretic model. The model reveals that, while an "optimal" liability regime indeed exists, its features appear at odds with conventional legal templates. For example, it frequently prescribes damages payments from seemingly unlikely defendants, directing them to seemingly unlikely plaintiffs. The challenge of introducing such a regime using existing tort law doctrines, therefore, is likely to be prohibitive. Instead, we argue, efficient precaution incentives may be best provided by alternative policy mechanisms, such as a mutual public insurance pool for potential targets of terrorism, coupled with direct compensation to victims of terrorist attacks.
Suggested Citation: Suggested Citation
Lakdawalla, Darius N. and Talley, Eric L., Optimal Liability for Terrorism (October 2005). USC CLEO Research Paper No. C05-14. Available at SSRN: https://ssrn.com/abstract=838307 or http://dx.doi.org/10.2139/ssrn.838307