Uncertainty Regarding Interpretation of the “Negligence Rule” and Its Implications for the Efficiency of Outcomes

Abstract There are two ways that the negligence rule is interpreted. Under one interpretation a negligent injurer is liable for the entire harm to the victim; and under the other interpretation a negligent injurer is liable only for that part of the harm which can be ascribed to his negligence. Both these versions are efficient. However, if there is uncertainty regarding whether the court will be employing the full liability version or the incremental liability version for determining the liability of a negligent injurer, notwithstanding the fact that both the versions are efficient, inefficiency is possible. It is shown in the paper that a necessary and sufficient condition for efficiency in all cases is that the subjective probability with which the injurer expects the standard version to be employed must be greater than or equal to the subjective probability with which the victim expects the standard version to be employed. For the subset of applications without complementarities in the cares of the two parties and which are such that the total social costs are minimized at a unique care-configuration, it is shown that efficiency obtains regardless of the subjective probabilities with which the parties expect the two versions. One very important conclusion that emerges from the analysis of this paper is that when courts employ more than one liability rule, even if all the employed rules are efficient, the efficiency of all outcomes cannot be taken for granted merely on the ground of the efficiency of the employed rules.