Random Econ question (Econ and Law practice problem)

[Tulun]

I doubt I will encounter such a question on my upcoming final, but I am curious as to the answer, if anyone has it.

I can write out the whole spiel, but basically the gist is this:
We talked about the standard tort model in class and developed said model.
(Xm = injurer legal standard of care, Ym = victim legal standard of care)

Now, the problem is thus:
Create a new tort model that will allow for the optimal level of Victim and Injurer standard of care under strict liability.

The idea I had around it involves damages; depending on the level of care of both parties, damages could change IE, below Xm, injurer pays full damages, at Xm, if Y < Ym, it is proportional to cost of care; at Ym, injurer bears full cost again, thus establishing an equilibrium at (Xm, Ym). So the liability is always on injurer but is proportional to your response.
Unfortunately, I think this removes itself from the definition of strict liability per say... As I think it would force the victim to pay for damages unless they approach Ym (while strict liability has them never pay a cent, regardless).

Any thoughts, Econ peeps?

[Ferion]

I don't know much about the economics of law, but I think I kind of understand what your're saying. What do you mean by "legal standard of care", I've only seen models setup where x = dollars spent on care by injurer and some function F(x) = expected losses by the victim where F(x) is the expectation of actual damages. If I'm understanding what you're saying though, I think you're right that your model is removing itself from the definition of strict liability.

[Tulun]

This is a relatively good definition for legal standard of care: the watchfulness, attention, caution and prudence that a reasonable person in the circumstances would exercise.

Depending on the liability scheme they use, this will help the court determine who was at fault. In strict liability the injurer is ALWAYS at fault, regardless of the victims level of care.
So, what happens is that the injurer will take the legal standard of care (as more often than not, taking full care is more expensive than accident costs; if Accidents costs are more expensive than the cost of are, they will probably take the full care if they are strictly liable), whilst the victim will take no care at all. (I will note this is probably unrealistic; even if you aren't liable you probably don't want to get hurt. Vut the idea is you are less likely to take the legal standard of care because of a lack of incentive to do so. You have greater incentive if you would pay for your accident).
The point Xm, Ym, is generally considered a Nash Equilibrium under certain liability rules like simple neglience or negligence with contributory negligence.

I may not be giving enough information. They do represent a chunk of this (game theory, liability rules, some of the Hand model) mathematically that I am cutting out.
But, in general, how would you solve it before diving into the mathematics? I'm not sure how we would induce the legal standard of care under strict liability. It seems each person needs to become at fault at some point in order to induce them to improve their standard of care from 0 to Xm or Ym.

[Ferion]

I think I'm starting to understand what you're saying. As I said I don't know much about this stuff so I may be saying something completely obvious/wrong, but I think this is a pretty interesting question. It seems like the biggest issue is to get the victim's level of care from 0 towards the equilibrium, since in a strict liability model the injurer is always at fault. I may have some kind of idea for a model, but it has some pretty heavy assumptions so feel free to tell me how wrong it is haha.

Suppose you have a person A who is in a situation where he can be held strictly liable for his actions. Let M = the amount paid when an accident occurs. Now as you said, he can either take the level of care Xm or he can take full care. However, suppose he will never take full care since he can buy insurance I for the price of Pi so that acting at Xm with insurance will be less than the cost of full care. That is (P(M|Xm,I)*M + Pi) < P(M|High care)*M + (cost of high care). Now, suppose that the insurance he can buy will reduce the probability of him causing an accident to 0. So this will then mean that he will buy the insurance as long as Pi < P(M|Xm)*M since P(M|Xm,I)=0. This now means that person A can act at Xm for cheaper than the original cost of incurring accidents. Now suppose you have person B who would be the victim in this scenario. If he knows that person A has insurance so that the probability of A causing an accident is zero, he is going to move from a level of care of Ym from 0. If B does not know that person A has this unique form of insurance, he will eventually find out as information becomes less asymmetric by the only accidents occurring are those B does to himself because of his level of care. This will eventually cause him to move towards Ym, so we are now at our equilibrium of (Xm,Ym).

Honestly, I don't know if this works at all, but feel free to let me know what you think.

[Anton]

The Economics of Law, wow this is heavy stuff.

Well this is beyond my purview, but isn't it irrelevant what "standard of care" was owed by the injurer to the victim? In ye olde tort law, you were always liable for the full amount under strict liability if you could be proven. Thus, "standard of care" is a binary answer - either you owed it or you did not - and in the case the injurer is at fault, he always pays.

Any standard of care greater than 0 = injurer pays the maximum appropriate. I'm envisioning Xm as a tiered horizontal line as standard goes up.

[Ferion]

Maybe I'm misunderstanding "standard of care", but isn't it defined to be how much care a person takes to prevent an accident where the legal standard is the level some one considered a rational person would take? So it can't be a binary response. At least with this kind of definition it seems that way:

This is a relatively good definition for legal standard of care: the watchfulness, attention, caution and prudence that a reasonable person in the circumstances would exercise.

[Tulun]

I think I get where you're going. The problem is that I'm not sure if the victim's best reply (this is an essence a best reply mapping; under certain liability schemes, Xm, Ym represents a Nash equilibrium, as this is their best set of strategies) will be to increase his level of care -- even if the injurer is reducing his costs, he is still liable for care and the cost. If the victim knows it is strict liability, his best reply is always 0, as his marginal cost of care is greater than his liability (which is always zero). The asymmetry of the information may not be helpful, as long as strict liability is known for this accident, the victim's best reply seems to always be 0.
In essence, the Nash Equilibrium lies at (Xm, 0), if the goal of the victim is to minimize his costs (which as economists we like to assume).

I had a ghetto graph, but if you are interested in this specific material, his textbook is at: http://www.economics.ualberta.ca/nav...70&nav01=78405 under Notes. This is specifically chapter 5. the password is 378ec0n (zero).
The question is also somewhere in Exam pack B

In a variety of other liability schemes, like simple negligence, we often get the legal standard of care on both parts (which is shown in those notes). With simple negligence, it the victim liable when the injurer takes the legal standard of care: Thus, the injurer will take Xm.
If the injurer takes Xm, the best cost minimizing reply for the victim is Ym, as the victim is liable.

It's sort of a fun little notion, though, as you want some sort of way to induce the victim to change his best reply... but it seems the normal of way doing this is when he IS liable at some point (and vice versa; if the Victim is liable until his legal standard of care, then this induces the injurerer to change his standard of care once Ym is reached).

[Tulun]

In essence Anton, that makes some sense; but taking the legal standard of care is likely their best response as it decreases the probability of an accident. It minimizes the total cost (cost of buying care + total accident cost multiplied by the lowered probability).
This is very dependent per case, obviously, and determining legal standard of care isn't always cut and dry. But modeling is always about some sort of simplification