Due-Care Standards in a Market Setting with Legal Error

29 Pages Posted: 28 Sep 2006

See all articles by Bharat Bhole

Bharat Bhole

Rochester Institute of Technology

Abstract

We consider a monopoly market setup with legal error, where social welfare is negatively related to a firm's expected liability costs. In this context, we investigate the optimal location of the due-care standard vis-à-vis any given desired care level. It is found that when both the due-care standard and the penalty multiplier are choice variables, setting the due-care equal to the desired care is unlikely to be optimal and conditions under which it should be made relatively lenient or stringent are obtained. Exogenous restrictions on the penalty multiplier may restrict the extent to which the due-care can be manipulated to improve welfare.

Keywords: Legal Error, Negligence, Due-Care Standard, Penalty Multiplier, Expected Liability Cost

JEL Classification: K13, K32

Suggested Citation

Bhole, Bharat, Due-Care Standards in a Market Setting with Legal Error. International Review of Law and Economics, Forthcoming. Available at SSRN: https://ssrn.com/abstract=930476

Bharat Bhole (Contact Author)

Rochester Institute of Technology ( email )

92 Lomb Memorial Drive
Rochester, NY 14623-5604
United States

HOME PAGE: http://www.rit.edu/~blbgse

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