Efficient Liability Rules for Multi-Party Accidents with Moral Hazard

E. Feess, U. HEGE

Journal of Institutional and Theoretical Economics

1998, vol. 154, n°2, pp.422-450

Departments: Finance

The economic analysis of tort law is extended to multi-party accidents with unobservable actions. Due to the requirement of no punitive damages, the problem resembles a team production problem. It is shown that asymmetry in the agents' impact on the stochastic damage function can be exploited to improve ex ante incentives. This implies departures from the proportional rule, based on the statistical information contained in the circumstances of the accident. If a noisy monitoring technology is introduced, then monitoring can add enough stochastic identifiability among injurers to restore efficiency.