Strict liability with a defence of contributory negligence

Finally, let us consider a rule of strict liability with a defence of contributory negligence. Suppose that the due standard of care for workers is zv = x*, and suppose that firms offer the following wage and care combination:

This wage-care combination will induce workers to behave efficiently, and this is the unique competitive equilibrium. The reason for this is straightforward: under this legal rule, firms are liable for the costs of accidents unless workers behave negligently. Thus, if workers are offered the wage-care combination in (6.29) and choose a level of care that is less than the efficient level, they will bear the costs of any accidents and will therefore receive less than their reservation wage in expectation. In other words, when faced with the wage-care combination in (6.29) under this legal rule, worker net benefits are maximised by them choosing the efficient level of care. And, since firms are liable for costs once workers behave efficiently, it is also in firms' interests to minimise these costs, and so firms too behave efficiently.

In other words, for any other wage-care combination that is offered, a 'rogue' firm can always offer the wage-care combination in (6.29) and make higher profits. Furthermore, the only wage-care combination where such profit-boosting behaviour is not possible is precisely the combination in (6.29). Hence (6.29) is the unique competitive equilibrium under this legal rule, which means that it produces efficient outcomes.

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