There is a vast literature on the economics of accident law. The literature on the bilateral care model begins with Brown (1973). Shavell (1987) and Landes and Posner (1987) are thorough book-length treatments of both the unilateral and bilateral care models.

Exercises

1. Suppose that A drives his truck at a speed of 80 km/hr, and B drives his car at a speed of 70 km/hr. A and B nearly collide, and B is forced to take evasive action. B crashes into a tree and his car (worth $10,000) is written off. B sues A for these damages. A sustains no damages.

Consider the following six legal rules:

• Strict Liability for Truck Drivers

• No Liability

• Negligence Rule for Truck Drivers

• Strict Liability with a Defence of Contributory Negligence

• Negligence Rule with a Defence of Contributory Negligence

• Comparative Negligence

Who is liable, and how are damages allocated under each of these rules? How would your answers change if the due standard for the injurer and the victim is 50km/hr? 70km/hr?

2. Consider the table below, which lists the levels of care, costs of care, and so on, for the injurer and a victim in a simple accident law game.

Levels of care

Cost of care

Expected

Total

Injurer

Victim

Injurer

Victim

damage

costs

None

None

0

0

30

None

Care

0

4

24

Care

None

6

0

20

Care

Care

6

4

12

(a) Complete the missing cells of the table suppose that there is a rule of strict liability. Write down the payoff matrix of the players under this legal rule. What is the Nash equilibrium in this game? Is the legal rule efficient? Give a brief economic explanation.

(b) Now suppose that there is a rule of no liability. Write down the payoff matrix of the players under this legal rule. What is the Nash equilibrium in this game? Is the legal rule efficient? Give a brief economic explanation.

(c) Now suppose that there is a negligence rule, which says that the injurer will be obligated to pay damages if he chooses {None}, but will not be held liable if he chooses {Care}. Write down the payoff matrix of the players under this legal rule. What is the Nash equilibrium in this game? Is the legal rule efficient? Give a brief economic explanation.

(d) Now suppose that the legal rule is strict liability with a defence of contributory negligence, which states that the injurer is always obligated to pay all of the victim's damages, except if the victim is contributorily negligent (i.e. if the victim chooses {None}), in which case the injurer does not have to pay damages. Write down the payoff matrix of the players under this legal rule. What is the Nash equilibrium in this game? Is the legal rule efficient? Give a brief economic explanation.

(e) Now suppose that the legal rule is a negligence rule with a defence of contributory negligence, which states that if the injurer is negligent (i.e. if the injurer chooses {None}), he must pay the victim's damages, except if the victim is contributorily negligent (i.e. if the victim chooses {None}), in which case the injurer does not have to pay damages. Write down the payoff matrix of the players under this legal rule. What is the Nash equilibrium in this game? Is the legal rule efficient? Give a brief economic explanation.

3. In Chapter 4 we examined situations instances involving compensating victims for accidental harm, where injurers were wealth constrained - the injurer's total assets are less than the damage that they might actually cause. Suppose that the injurer has assets of a > 0, but that a < h, where h is the damage caused to victims. Consider the bilateral care model of accidents studied in this chapter, and consider the following legal rules:

• No liability

• Strict liability

• Negligence Rule

• Strict Liability with a Defence of Contributory Negligence

• Negligence Rule with a Defence of Contributory Negligence

• Comparative Negligence

Which of these legal rules can induce both injurers and victims to take an efficient amount of care when injurers are wealth constrained?

4. The Hand rule for determining negligence was formulated by Judge Learned Hand in the 1947 case of US v. Carroll Towing Company. Let B be the burden (or cost) of the untaken precaution, P be the probability of an accident given that the precaution was not taken, and L be the injury (damage) from the accident. Using these variables, the Hand rule for determining negligence is that an individual is negligent if B < PL .

Using the bilateral model of accident law, critically examine the Hand rule. Does the rule induce injurers and victims to take the efficient level of care? If so, explain why. If not, formulate a different version of the Hand rule which leads to efficient outcomes.