Two Advantages of the Negligence Rule Over Strict Liability when the Parties are Risk Averse
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Henrik Lando
Abstract
When parties are risk-averse and therefore take out insurance, the efficiency of a tort rule depends on how well the insurance contracts govern incentives, risk allocation and transaction costs under the rule. This article presents two overlooked or discarded advantages of the rule of negligence over strict liability, which appear when insurance contracts are incomplete due to ex-ante transaction or ex-post verification costs. One advantage arises because of a legal impediment under strict liability: insurers cannot exempt coverage for all acts of simple negligence. Instead, the insurer must, at a cost, precisely specify each act for which coverage is excluded. Such specification can be prohibitively costly when there are many acts and many contingencies. These transaction costs, or the inefficient risk allocation associated with a deductible, are avoided under the negligence rule, where under idealized conditions the injurer can simply take due care and need not take out insurance. The other advantage of the negligence rule is that it provides incentives for the victim to bring forward information about the injurer’s acts. The victim has little incentive to convey such information under strict liability, whereas the victim’s insurer may elicit it, e. g. by not covering the victim’s loss fully.
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Articles in the same Issue
- Articles
- Two Advantages of the Negligence Rule Over Strict Liability when the Parties are Risk Averse
- Is a ‘Bad Individual’ more Condemnable than Several ‘Bad Individuals’? Examining the Scope-severity Paradox
- Leniency Programs and Cartel Organization of Multiproduct Firms
- Fairness Vs. Economic Efficiency: Lessons from an Interdisciplinary Analysis of Talmudic Bankruptcy Law
- Individual or Enterprise Liability? The Roles of Sanctions and Liability Under Contractible and Non-contractible Safety Efforts
- US State Tort Liability Reform and Entrepreneurship
Articles in the same Issue
- Articles
- Two Advantages of the Negligence Rule Over Strict Liability when the Parties are Risk Averse
- Is a ‘Bad Individual’ more Condemnable than Several ‘Bad Individuals’? Examining the Scope-severity Paradox
- Leniency Programs and Cartel Organization of Multiproduct Firms
- Fairness Vs. Economic Efficiency: Lessons from an Interdisciplinary Analysis of Talmudic Bankruptcy Law
- Individual or Enterprise Liability? The Roles of Sanctions and Liability Under Contractible and Non-contractible Safety Efforts
- US State Tort Liability Reform and Entrepreneurship
