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Accessible Unlicensed Requires Authentication Published by De Gruyter September 11, 2020

On the Choice of Liability Rules

Rajendra P. Kundu ORCID logo and Debabrata Pal ORCID logo

Abstract

Legal assignment of liabilities for losses arising out of interactions involving negative externalities usually depend on which of the interacting parties are negligent and which are not. It has been established in the literature that, if negligence is defined as failure to take some cost-justified precaution then there is no liability rule which can always lead to an efficient outcome. The objective of this paper is to try and understand if it is still possible to make pairwise comparisons between rules on the basis of efficiency and to use such a method to explain/evaluate choices from a given set of rules. We focus on a set of five of the most widely analyzed rules (no liability, strict liability, negligence, negligence with the defense of contributory negligence and strict liability with the defense of contributory negligence), and use a binary relation according to which a rule in the set is considered to be at least as efficient as another if and only if the set of applications for which it is inefficient is a subset of the set of applications for which the other one is inefficient. We show that, with respect to the above mentioned relation, pairwise comparisons between rules in this set fail. The paper, thus, demonstrates that an efficiency based explanation for any choice from these five rules is not consistent with the notion of negligence defined as failure to take some cost-justified precaution.

JEL Classification: K13; K40; C72; D60; D62

Corresponding author: Rajendra P. Kundu, Centre for Economic Studies and Planning, School of Social Sciences, Jawaharlal Nehru University, New Delhi, 110067, India, E-mail:

Authors would like to thank Siddhi Gyan Pandey, Taposik Banerjee, Mukta Jain, Prerna Khanna, the participants of the Conference on Law and Economics: Theoretical & Empirical Explorations (organized by NALSAR Hyderabad, 19–20 January, 2019), and three anonymous referees for helpful comments and suggestions.


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Received: 2019-10-28
Accepted: 2020-02-26
Published Online: 2020-09-11

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