Optimal Liability : The Effects of Risk Aversion, Loaded Insurance Premiums, and the Number of Victims

This paper deals with the determination of optimal liability rules under the assumption of risk aversion and loaded insurance premiums. While in a world with risk neutral economic actors and/or actuarially fair insurance premiums the allocation of risk does not matter for the efficiency of liability rules, the results are different for risk averse parties and loaded premiums. It is shown that under these conditions optimal liability rules stipulate a strict division of accident losses between injurer and victim and that the shares in liability depend on the loading. Furthermore it is shown that the number of potential victims has to be considered for determination of optimal liability