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Risk Aversion, the Hand Rule, and Comparison between Strict Liability and the Negligence Rule

  • Kangoh Lee EMAIL logo
Published/Copyright: August 20, 2015
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Abstract

One of the most important propositions in the economics of liability rules states that strict liability and the negligence rule are equivalent and first-best efficient if the standard of due care is set according to the Hand rule. This proposition hinges on the assumption that individuals are risk neutral. This paper considers this proposition with risk-averse individuals, and demonstrates that the proposition does not extend. In particular, the two liability rules are not equivalent, and the analysis compares the two liability rules in terms of utilitarian social welfare.

JEL: G22; K13

Acknowledgement

I am grateful to an anonymous referee for his/her helpful comments.

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Published Online: 2015-8-20
Published in Print: 2016-7-1

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