The Information Advantage of the Negligence Rule Over Strict Liability

Abstract

As an instrument of regulation of externalities, tort law can be particularly effective when it is important to induce victims of harm to come forward with information about harmful acts committed by injurers. The point of the present paper is that this informational role of tort law is more pronounced under the rule of negligence than under strict liability, since victims are induced to provide detailed information that can justify a ruling of negligence. It is argued that the greater production of information under the negligence rule may render the negligence rule more efficient than strict liability when the parties are risk averse. This is illustrated in simple examples of unilateral care, including both an example of an idealized tort system and an example where the injurer may be negligent by mistake. Under the ideally functioning tort system, the injurer will not take out insurance under the negligence rule but will simply take due care and then not be subject to liability. Under strict liability, by contrast, the injurer will take out insurance, which induces moral hazard. The rule of negligence hence induces a first-best outcome while strict liability induces only a second-best outcome. When the injurer may commit mistakes, he is likely to take out insurance, in which case moral hazard arises also under the negligence rule. However, it is shown that the more informative signal conveyed by the victim about the injurer's behavior may render the insurance contract more efficient under the rule of negligence.

Keywords: strict liability, negligence rule, insurance

JEL Classification: K13