Efficient liability law when parties genuinely disagree

Luigi Alberto Franzoni (University of Bologna)

Abstract

This paper extends the classic economic approach to liability law to the case in which injurer and victim rely on diverent "causation models" and, hence, entertain diverent beliefs about the probability of injury. Under strict liability, the precaution level is pegged to the causation model of the injurer; under negligence, to that of the victim. By relying on the notions of Pareto effciency and No Betting Pareto effciency, the paper shows that negligence is the optimal liability rule when the injurer believes that the probability of harm is higher than the victim does, while strict liability with overcompensatory damages is the optimal rule in the opposite case. The same results apply to bilateral accidents and product-related harms.

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