Efficient Liability Rules When Courts Make Errors in Estimation of the Harm : Complete Characterization

A liability rule determines whether and how much damage (liability) payments are to be made by the injurer(s) to the victim(s) of an accident. Damage awards are critical for the efficiency or otherwise of liability rules. One of the factors affecting damage awards and, as a consequence, efficiency characteristics of liability rules is the errors made by courts in estimation of the harm suffered by the victims. In this paper efficiency properties of liability rules when courts make errors in estimation of the harm are studied. Effects of courts' errors on parties' behaviour regarding the levels of care they take to prevent the accident are analyzed. A condition called negligent injurer's liability is introduced. When courts make upper-biased errors, condition negligent injurer's liability is shown to be necessary and sufficient condition for a liability rule to be efficient. The notion of simple liability rules is also introduced and discussed. Analysis is carried out in a quite broader framework. In particular, the standard assumption that costs of care and expected loss functions are such that total social costs of accident are minimized at a unique configuration of care levels is relaxed.