Social Wealth and Optimal Care

Abstract

Many accidents result in losses that cannot be perfectly compensated by a monetary payment. Moreover, often injurers control the magnitude rather than the probability of accidents. We study the characteristics of optimal levels of care and distribution of risk under these circumstances and show that care depends on the aggregate wealth of society but does not depend on wealth distribution. We then examine whether ordinary liability rules, regulation, insurance, taxes and subsidies can be used to implement the …rst-best outcome. Finally, our results are discussed in the light of fairness considerations (second best).JEL codes: K13