Research Handbooks in Law and Economics series
Edited by Thomas J. Miceli and Matthew J. Baker
Chapter 4: Regulation versus liability: a behavioural economics perspective
Much of the field of law and economics focuses on the design and evaluation of alternative ways of reducing accident risks. In the context of environmental or safety risks, two alternative approaches are regulation and legal liability for damages. Regulations are designed to control directly decisions that affect either the probability of an accident or the damages that would result if an accident were to occur. They are invoked ëex ante,í i.e., before an accident occurs. In contrast, liability is invoked ëex post,í i.e., after an accident occurs, but anticipation of the imposition of liability can create incentives for changes in behavior that reduce accident risks. In practice, a combination of the two is often used. For example, in the U.S. the risks associated with hazardous waste disposal are controlled both through the regulation of disposal-related activities under the Resource Conservation and Recovery Act (RCRA) and through the imposition of legal liability under the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA). There is a large literature within the field of law and economics comparing the welfare effects of reducing environmental or safety risks through regulation versus liability. This dates back to the early work by Shavell (1984a, 1984b). It identifies potential tradeoffs in the use of liability versus regulation (see, for example, Shavell 1993).
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