Research Handbook on Economic Models of Law

Research Handbook on Economic Models of Law

Research Handbooks in Law and Economics series

Edited by Thomas J. Miceli and Matthew J. Baker

One of the great successes of the law and economics movement has been the use of economic models to explain the structure and function of broad areas of law. The original contributions to this volume epitomize that tradition, offering state-of-the-art research on the many facets of economic modeling in law.

Chapter 5: Strict liability when victims choose the value of the asset at risk

Florian Baumann and Tim Friehe

Subjects: economics and finance, history of economic thought, law and economics, methodology of economics, law - academic, law and economics


From an economic perspective, tort law serves to promote optimal behavioral incentives for potential injurers and victims. Incentives are to a large extent shaped by the level of compensation (i.e., damages) in the event of an accident. Consequently, the proper damages awards are a critical ingredient of efficient tort liability systems (Visscher 2009). In the system we focus on in this chapter, strict liability, standard economic prescriptions predict that incentives will be optimal when the injurer is obliged to compensate the victim for harm caused, thereby internalizing the full expected social costs resulting from the injurerís behavior. However, when there are different potential levels of harm which cannot be discriminated by the injurer ex ante, then efficient care incentives result when average damages payments for accidents are equal to the level of average harm incurred by the accidents (Kaplow and Shavell 1996). This requirement permits a certain flexibility in how this equivalence is established; the reimbursement of actual harm for each accident or a fixed reimbursement equal to the average harm incurred in accidents are just two of the possible options (Arlen 2000). If we seek to ensure the equivalence between average damages payments and average harm, the freedom to choose the precise level of compensation in a given case may be restricted when victim incentives are taken into account, as this chapter will demonstrate.

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