Bilateral Accidents with Intrinsically Interdependent Costs of Precaution

Abstract

The standard economic model of bilateral precaution postulates an interdependency between the care taken by injurers and victims that operates through the effects of each on the expected accident loss. This paper considers situations in which each partys precaution affects not only expected accident loss, but also directly affects the other partys cost of taking precaution. Generalizing the economic model of tort law in this way allows for a more complete analysis of when standard tort rules can and cannot induce optimal precaution. When this additional externality is introduced into a model of unilateral harm (where all accident losses are borne by the victim), none of the standard tort liability rules induces socially optimal behavior by both parties. Moreover, under a contributory negligence rule, the only equilibrium is in mixed strategies; this gives rise to the possibility of litigation in equilibrium. A 'tort-like' liability rule that induces socially optimal behavior by both parties is then characterized; this involves a payment by victims to non-negligent injurers whenever an accident occurs. The model is then extended to consider the case of bilateral harm (where both parties suffer accident losses). It is shown that, as long as both parties can sue to recover their accident losses, all negligence-based tort rules lead to socially optimal behavior by both parties.1 The standard model has its origins in the analysis of Brown (1973). See also e.g. Ordover (1978) on litigation costs, Craswell and Calfee (1986) on uncertainty, and Shavell (1986) on wealth constraints. 2 The optimality result does not extend, in general, to the choice of activity level. This paper focuses on the choice of levels of care, and does not consider the issue of activity levels.

Victim interdependence in the accident setting

“…The former effect takes shape in the reduction of the accident probability of the potential victim taking the precaution, whereas the latter effect manifests in the increase of the accident probability of other potential victims. Second, there is an analysis by Dharmapala and Hoffmann (2005) in which, in addition to the traditional interdependence, there is another interdependent relationship analyzed between the potential injurer and the potential victim resulting from the potential imposition of harm. In contrast to our setting, this nouveau interdependence introduced by the authors also relates the single potential injurer to the single potential victim.…”

“…As stated above, Dharmapala and Hoffmann (2005) assume that the threat of expected harm is always sufficient for the individual to find it beneficial to increase care to standard care. Such an assumption takes the requisite…”

“…Note that, for instance,Dharmapala and Hoffmann (2005) assume that an analogue to (9) always holds for " x\x à and any (y, z).…”

On judgment proofness in the case of bilateral harm

“…5 Indeed, it often is irrelevant whether the unilateral-harm or the bilateralharm framework is used (see, e.g., Cooter and Ulen 2004, p. 331). However, Dharmapala and Hoffmann (2005) recently established that the incentives created by unilateral-harm and bilateral-harm contexts are not the same when it comes to care incentives if the precaution costs are interdependent. Our paper makes a similar contribution.…”

“….7 Dharmapala and Hoffmann (2005) likewise impose assumptions to keep clear the argumentation in the bilateral-harm setting.…”