Research Handbook on Economic Models of Law
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Research Handbook on Economic Models of Law

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.
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Chapter 3: Liability versus regulation for product-related risks

Thomas J. Miceli, Rebecca Rabon and Kathleen Segerson


Liability and safety regulation represent alternative mechanisms for controlling the risks that often arise from otherwise socially beneficial activities. Liability represents a private response whereby the victim of an accident brings suit for monetary damages against the responsible party, while regulation is a publicly imposed and enforced standard of conduct or safety that potential injurers must adhere to under threat of legal sanction. Historically, product-related harm was largely controlled by market forces under the doctrine of caveat emptor, or buyer beware, but the twentieth century witnessed a trend toward increasing producer liability, culminating with the establishment of strict producer liability in the 1960s (Cooter and Ulen, 1988, pp. 421ñ436). Government regulation of product safety, as distinct from tort liability, did not emerge until the 1970s, but has since become an important means, along with the liability system, for controlling product risk (Viscusi, Harrington, and Vernon, 2005, Chapter 22). Shavell (1984) has examined the optimal choice between these two modes of controlling risk in the context of a standard model of accidents between strangers (i.e., parties not in a contractual relationship). His analysis showed that neither approach generally produces the socially optimal level of risk-reduction. The drawback of regulation is that it sets a single standard that applies to all accident settings, given the inability of the regulator to observe victim-specific harm. Thus, care is not individualized under the optimal regulatory standard.

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