On the Existence and Efficiency of Equilibria under Liability Rules

Abstract

While focus of the mainstream analysis of liability rules has been on negligence based liability, some recent works have recommended sharing of liability between the parties involved in an accident. In this paper, we study the implications of various approaches to liability assignment for the existence and efficiency of equilibria under liability rules. Contrary to what is suggested in the literature, we show that the sharing of liability when parties are either both negligent or both non-negligent does not threaten the existence of equilibria. Moreover, it does not dilute the incentive for the parties to take the due care. Also, we extend the analysis to search for the second-best liability rules; since in view of Shavell (1987) no liability rule can achieve the first best outcome. We show that each of the standard liability rules fails to be efficient even from from a second best perspective. We show that second best efficiency requires loss sharing between non-negligent parties. As implications of our main results, we reexamine some of the existing claims regarding the existence and efficiency of equilibria under liability rules.