Decomposition of Accident Loss and Decoupled Liability Assignment : A Class of Negligence Rules

This paper is a contribution to the literature on efficient assignment of liabilities for accidental losses arising out of two party interactions involving negative externalities. The objective is to examine the requirements that efficiency imposes on rules for the assignment of liabilities for such losses. We study efficiency properties of a very general class of rules which (i) decompose the loss into two components (specified loss and excess loss);(ii) assigns the entire excess loss to the injurer if she is negligent and to the victim otherwise; and assigns fixed proportions (not necessarily adding up to 1) of the specified loss to the two parties with the possibility of eventually resulting in an assignment of liabilities which can in principle be decoupled. In contrast to existing results we demonstrate that assignment of the specified loss is also important for efficiency and complete decoupling is not inconsistent with efficiency