Probability Errors: Some Positive and Normative Implications for Tort and Contract Law

Abstract

This paper examines the effect of tort rules on behavior if people are optimistic or insensitive relative to true probabilities. The paper shows that under certain conditions both strict liability and negligence cause levels of care that are higher than, or equal to, what is efficient (rather than lower). The paper also shows that under certain conditions strict liability and negligence cause the same level of activity among optimists (more than is efficient). Other implications for tort law are discussed, as are the sensitivity of the results to the choice of how to model probability errors. Implications for contract law, and some normative issues, are also discussed.

Keywords: tort, contract law, normative issues

JEL Classification: K0, K1