Liability rules and the gains from mergers and corporate takeovers

In many instances, the levels of care of more than one injurer may affect the probability of an accident and the extent of harm to victims.

For example, there may be two firms whose output together increases the probability of harm occurring to a victim. In this situation, there are multiple externalities: each firm's actions affect the victim, but the actions of each also affect the other. This section analyses the incentive and efficiency effects of various kinds of liability rules in these settings. As a by-product of the analysis, it is also possible to place a value on the gains from firms merging.

The model is a straightforward extension of the unilateral and bilateral care models of Chapters 4 and 5. Suppose that victims cannot take any care to avoid accidents, and suppose that there are two firms, labelled 1 and 2, who are potential injurers. The probability of accidental harm is:

where x1 is the level of care of firm 1, and x2 is the level of care of firm 2. In what follows, let w1 be the marginal cost of care for firm 1, let w2 be the marginal cost of care for firm 2, and let h > 0 be the dollar value of damage to the victim if an accident occurs.

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