On the Choice of Liability Rules

Abstract

Rules for the 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 taken precaution then there is no 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 liability 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 the of five of the most widely used rules and show that 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.