The judgement proof problem

In some instances involving compensating victims for accidental harm, injurers are wealth constrained - the injurer's total assets are less than the damage that they might actually cause. This is also known as the 'judgement proof problem'. Suppose that the injurer has assets of a > 0, but that a < h, where h is the damage caused to victims. Let's consider the unilateral care model of accidents studied in class, and consider the following legal rules:

  • • No liability
  • • Strict liability
  • • Negligence rule

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

No liability.

Under a no liability rule, the injurer's expected costs are:

for any level of assets. Thus, the injurer always chooses xt = 0, and so this rule cannot be efficient.

Strict liability.

Under a rule of strict liability, the injurer's expected costs are:

Because the injurer does not face the full social costs of his actions (he only has to pay a < h when the damage is h), he chooses xt < x*. So a rule of strict liability is also inefficient here.

Negligence rule.

Assuming the due standard is set at Zj = x*, the injurer's expected costs are:

Suppose that x? minimizes w{x{ + p(x{ )a. Since a < h, we know that x°< x* But it could be possible that:

which could hold if a is sufficiently low. For example, in the extreme case that the injurer has no assets, he will take no care. More generally, suppose, for example, that a = a2 in Figure 4.2.5. Then xi = x°° (rather than xi = x*) would be chosen by the injurer, since: A judgement proof injurer

Figure 4.2.5 A judgement proof injurer

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