A Unilateral Accident Model under Ambiguity

Abstract

Standard accident models are based on the expected utility framework and represent agents' beliefs about accident risk with a probability distribution. Consequently, they do not allow for Knightian uncertainty, or ambiguity, with respect to accident risk and cannot accommodate optimism (ambiguity loving) or pessimism (ambiguity aversion). This paper presents a unilateral accident model under ambiguity. To incorporate ambiguity, I adopt the Choquet expected utility framework and represent the injurer's beliefs with a neoadditive capacity. Ishow that neither strict liability nor negligence is generally efficient in the presence of ambiguity. In addition, I generally find that the injurer's level of care decreases (increases) with ambiguity if he is optimistic (pessimistic) and decreases (increases) with his degree of optimism (pessimism). The results suggest that negligence is more robust to ambiguity and, therefore, may be superior to strict liability in unilateral accident cases. Finally, I design an efficient ambiguity-adjusted liability rule.

Safety and the Allocation of Costs in Large Accidents

“…Remark that, under the assumption that a benevolent planner acts for society 8 , we obtain a result which is di¤erent as compared to Bigus (2006), Eide (2005), or Teitelbaum (2007), in several respects. Given that we consider a case with aggregate risk, our characterization of the …rst best care yields a level di¤er-ent than in the risk-free case (1).…”

“…Graph 1 : A typical probability distorsion function Teitelbaum (2007) uses a slightly di¤erent model of the a unilateral accident, which introduces ambiguity in the knowledge of the probability of accident. The injurer's beliefs are represented by a neo-additive capacity (Chateauneuf and ali (2003)): the functional representing his preferences is thus de…ned as the weighted sum of the best, worst and expected outcomes associated to the ambiguous prospect he faces.…”

Optimal Liability Design Under Risk and Ambiguity

“…Note how my arguments in favor or against the Negligence rule differ from those of Teitelbaum (2007). In my view, risk and ambiguity are the basic dimensions of uncertainty: both contribute to the social cost of accidents.…”

“…This approach characterizes the "first generation" models of ambiguity aversion, pioneered by Schmeidler (1989), and successfully applied to liability law by Teitelbaum (2007). Specifically, Teitelbaum formalizes ambiguity along the lines of the neo-additive model of Chateauneuf et al (2007), in which 30 The diverging beliefs case has been successfully employed in the litigation literature to explain settlement failure.…”

“…A closely related work is the pioneering contribution of Teitelbaum (2007), who uses Choquet's Expected Utility theory to account for the injurer's aversion to ambiguity in a unilateral accident model. Teitelbaum posits that when parties lack confidence on the probability of harm they make decisions taking an average of the best outcome (no accident), the worst outcome (accident) and the expected utility of the accident prospect.…”