Optimal Liability for Terrorism

47 Pages Posted: 31 Oct 2005

See all articles by Darius N. Lakdawalla

Darius N. Lakdawalla

University of Southern California - Schaeffer Center for Health Policy and Economics; RAND Corporation; National Bureau of Economic Research (NBER)

Eric L. Talley

Columbia University - School of Law; European Corporate Governance Institute (ECGI)

Multiple version iconThere are 2 versions of this paper

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

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

Darius N. Lakdawalla (Contact Author)

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