Published 01/12/2009
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Insolvency and Biased Standards - the Case for Proportional Liability

S.Alexander , T.Avraham

Keywords
Introduction
First, some injurers may be insolvent due to limited liability or because their assets are insu!cient to satisfy a judgment against them. Second, courts may err in determining whether an injurer acted negligently, for example, because of hindsight bias. Although access to expert witnesses may reduce the occurrence of court errors and certain legal strategies can mitigate the judgment proof problem, both problems continue to pervade areas such as environmental torts and medical malpractice.
Resume
We analyze liability rules in a setting where injurers are potentially insolvent and where negligence standards may deviate from the socially optimal level. We show that proportional liability, which sets the measure of damages equal to the harm multiplied by the probability that it was caused by an injurers negligence, is preferable to other existing negligence-based rules. Moreover, proportional liability outperforms strict liability if the standard of due care is not set too low.
Method
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Results
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Conclusion
We analyze liability rules in a setting where injurers are potentially insolvent and where negligence standards may deviate from the socially optimal level. We show that proportional liability, which sets the measure of damages equal to the harm multiplied by the probability that it was caused by an injurer’s negligence, is preferable to other existing negligence-based rules. Moreover, proportional liability outperforms strict liability if the standard of due care is not set too low. Our analysis also suggests that courts should rely on statistical evidence and bar individualized causal claims that link the harm suffered by a plaintiff to the actions of the defendant. Finally, we provide a result which might be useful to regulators when calculating minimum capital requirements or minimum mandatory insurance for different industries.
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