Article
Bell Journal of Economics

On the Optimal Structure of Liability Laws

Format:Print

Abstract

We consider the control of tvo-party accidents through the use of liability rules that assign damages according to whether or not predetermined standards for care have been met. Particular emphasis is given to how the differential in the costs of accident avoidance activities affects the optimal legal rule and optimal care standards. It is shown that when the costs are close to uniform across individuals, an approximation to thefirst-best can be obtained. Moreover, alternative legal rules are equally efficient in achieving this situation. Whien the differential wvidens, legal rules will differ in their ability to reach the second-best. In contrast to previous models of liability law, it is shown that the courts must play an active adjudicatory role in the optimal solution.