Carbonara, Guerra and Parisi, ‘Sharing Residual Liability: “Cheapest Cost Avoider” Revisited’

Economic models of tort law evaluate the efficiency of liability rules in terms of the precaution and activity-level incentives they create. On this framing of the problem, a liability regime is optimal when it creates incentives to maximize the value of risky activities. However, while negligence-based systems are able to incentivize individuals to exercise an efficient level of precautionary care, affecting activity level incentives directly has proven either prohibitively costly or impossible outright. Nevertheless, the allocation of residual liability allows policymakers to manipulate activity levels indirectly. Traditionally, tort law systems have assigned residual liability either entirely on the tortfeasor or entirely on the victim. In this paper, we consider the virtues and the limits of loss-sharing rules on incentivizing optimal (or second-best) activity-level incentives. We unpack the “cheapest cost avoider” principle to identify conditions under which loss-sharing or all-or-nothing rules are preferable. We find that loss-sharing may be optimal in the presence of countervailing policy objectives and in situations with homogeneous risk conditions, potentially offering a valuable tool for policymakers in awarding damages in a large number of real-world accident cases.

Carbonara, Emanuela, Guerra, Alice and Parisi, Francesco, Sharing Residual Liability: ‘Cheapest Cost Avoider’ Revisited (June 29, 2013).

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