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Theory and Decision

, Volume 77, Issue 4, pp 531–556 | Cite as

Relative performance of liability rules: experimental evidence

  • Vera AngelovaEmail author
  • Olivier Armantier
  • Giuseppe Attanasi
  • Yolande Hiriart
Article

Abstract

We compare the performance of liability rules for managing environmental disasters when third parties are harmed and cannot always be compensated. A firm can invest in safety to reduce the likelihood of accidents. The firm’s investment is unobservable to authorities. The presence of externalities and asymmetric information call for public intervention in order to define rules aimed at increasing prevention. We determine the investments in safety under No Liability, Strict Liability, and Negligence rules, and compare these to the first best. Additionally, we investigate how the (dis)ability of the firm to fully cover potential damage affects the firm’s behavior. An experiment tests the theoretical predictions. In line with theory, Strict Liability and Negligence are equally effective; both perform better than No Liability; investment in safety is not sensitive to the ability of the firm to compensate potential victims. In contrast with theory, however, prevention rates absent liability are much higher and liability is much less effective.

Keywords

Risk regulation Liability rules Incentives Insolvency Experiment 

JEL Classification

D82 K13 K32 Q58 

Notes

Acknowledgments

We thank David Alary; Marie Obidzinski; participants at the 15th Conference on the Foundations and Applications of Utility, Risk and Decision Theory (FUR) in Atlanta, the 10th Annual Conference of the German Law and Economics Association in Magdeburg, 19th Annual Conference of the European Association of Environmental and Resource Economists (EAERE) in Prague, the French Experimental Economics Association Annual Meeting (ASFEE) in Montpellier, the LAMETA Seminar (University of Montpellier), the CREM Seminar (University of Rennes), the CES-ifo Conference on Law and Economics in Munich, the ESREL Annual Conference in Troyes, the 20th SRA-Europe Meeting in Stuttgart, and the International Workshop on Economic and Financial Risks in Niort; as well as two anonymous referees for their useful comments and suggestions. The research leading to these results has received funding from the European Research Council under the European Community’s Seventh Framework Programme (FP7/2007-2013) Grant Agreement No. 230589. Financial support from the Foundation for an Industrial Safety Culture (FONCSI) and from the French Agence Nationale pour la Recherche (ANR) for the project Environmental Regulation and Market Imperfections is also acknowledged, together with CESifo sponsorship.

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Copyright information

© Springer Science+Business Media New York 2013

Authors and Affiliations

  • Vera Angelova
    • 1
    Email author
  • Olivier Armantier
    • 2
  • Giuseppe Attanasi
    • 3
  • Yolande Hiriart
    • 4
  1. 1.Technical University BerlinBerlinGermany
  2. 2.Federal Reserve Bank of New YorkNew YorkUSA
  3. 3.University of Strasbourg (BETA)StrasbourgFrance
  4. 4.Université de Franche-Comté (CRESE) and Institut Universitaire de FranceBesançonFrance

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