Giuseppe Dari-Mattiacci, Nuna Garoupa
Date Posted: 2004
This paper shows that the least cost avoider approach is not necessarily the optimal way to attain least cost avoidance. When parties do not observe each other's costs of precautions at the time of the accident they are unable to determine which party is the least cost avoider and hence fail to anticipate the out come of the adjudication. Under these circumstances, accident avoidance becomes a commons problem because the precaution of each individual party reduces the prospect of liability for both parties. As a result parties suboptimally invest in precaution. We show that regulation removes this problem and is superior both when parties act simultaneously and when they act sequentially. We further examine how different liability rules perform in this respect.