Relative performance of liability rules: experimental evidence

Abstract

We compare the performance of liability rules for managing environmental disasters when third parties are harmed and cannot always be compensated. A firm can invest in safety to reduce the likelihood of accidents. The firm's investment is unobservable to authorities. Externality and asymmetric information call for public intervention to define rules aimed at increasing prevention. We determine the investment in safety under No Liability, Strict Liability and Negligence, and compare it to the first best. Additionally, we investigate how the (dis)ability of the firm to fully cover potential damages affects the firm's behavior. An experiment tests the theoretical predictions. In line with theory, Strict Liability and Negligence are equally effective; both perform better than No Liability; investment in safety is not sensitive to the ability of the firm to compensate potential victims. In contrast with theory, prevention rates absent liability are much higher and liability is much less effective than predicted.

Lois et normes : les enseignements de l’économie comportementale

“…Par exemple, Angelova et al (2013) présentent une expérience de laboratoire où les participants peuvent se trouver dans la situation d'auteur de dommages accidentels causés à un tiers ou dans la situation de victime, sans savoir initialement dans quelle situation ils seront à l'issue du jeu. Ils ont la possibilité de prendre une action coûteuse pour eux mais réduisant le risque pour les tiers.…”

Unpacking Negligence Liability: Experimentally Testing the Governance Effect

“…Angelova et al () replicate Kornhauser and Schotter (), but now have a real victim, and also test a regime with no liability. They find that participants invest substantially in precautions even if there is no liability.…”

“…With our design, we are able to unpack the motivating effects of tort liability: making social expectations explicit, blaming tortfeasors, and holding them liable. Angelova et al (2012) replicate Kornhauser and Schotter (1990), but now have a real victim, and also test a regime with no liability. They find that participants invest substantially in precautions even if there is no liability.…”

Firm’s protection against disasters: are investment and insurance substitutes or complements?

“…However this is not true for strict liability, as also shown by Dopuch and King (1992) and King and Schwartz (1999), who studied the special case of liability rules for auditors. 1 Recently, Angelova et al (2014) have compared experimentally the performance of liability rules for investment in safety against environmental disasters when third parties are harmed and cannot always be compensated.…”

“…As a result, the economic implications of technological disasters are substantial and often catastrophic in their consequences (Pelling et al, 2002;Capelle-Blancard and Laguna, 2010). Moreover, the damages caused are frequently not paid for due to the insolvency of the responsible parties (Angelova et al, 2014), which points to the need to elaborate e↵ective risk management and financial security instruments to cope with the failures of such brittle technologies (Marsden, 2014).…”