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Abstract

This article compares the classic liability rules, negligence and strict liability, under the hypothesis that injurers and victims formulate subjective beliefs about the probabilities of harm. Parties may reasonably disagree in their assessment of the precautionary measures available: a measure regarded as safe by one party may be regarded as not safe by the other. By relying on the notions of Pareto efficiency and “No Betting” Pareto efficiency, the article shows that negligence is the optimal liability rule when injurers believe that the probability of harm is always higher than the victims do, while strict liability with overcompensatory damages is the optimal rule in the opposite case. The same results apply to bilateral accidents and, specifically, to product-related harms in competitive markets. Overcompensatory (“punitive”) damages provide consumers with insurance against their own pessimism.

Abstract

Take-up rates for windstorm-resistant buildings remain relatively low even in areas with high exposure to hurricanes and tropical storms. To further investigate this issue, we extend the theory on WTP for prevention to include risk attitudes up to the fourth order, deriving total effects and testable predictions for mixed risk averters and mixed risk lovers’ WTP relative to higher order risk-neutral benchmarks. We then employ field experiments to elicit and test the effects of higher order risk attitudes (HORAs) and information friction on coastal homeowners’ WTP for precautionary building standards with insurance discounts. To elicit risk attitudes and WTP, we employ 50-50 model-free risk apportionment lotteries and payment card WTP experiments. Empirical analyses reveal insightful heterogeneity in the correlation between homeowners’ HORA subgroups and WTP for precautions that is partially consistent with theory. We demonstrate strong causal effects of information friction on WTP for precaution in the absence of a truncated WTP range; however, the effects appear to be positive among risk lovers.

California has a wildfire crisis. Arguably, the entire Western United States has a wildfire crisis, but California’s crisis is of an entirely different magnitude.

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Abstract

Waiver contracts are agreements in which one party promises not to sue the other for injuries that occur during their contractual relationship. Waivers are controversial in the consumer context, especially when presented in standard form, take-it-or-leave-it contracts. The law on waivers appears muddled, with no consistent doctrine or policy among the courts on enforceability. The aim of this paper is to offer a consistent set of policies that can form the foundation of a consistent set of doctrines, leading ultimately to a more apparently consistent treatment of waivers in the courts. The most basic piece of this paper’s framework is a contract theoretic analysis of the wealth (or welfare) created by a contractual provision. In this framework, waivers should be enforceable when they are likely to increase the welfare of the contracting parties, and otherwise not enforceable. Waivers are likely to increase the welfare of the parties when litigation is likely to reduce their welfare. Litigation is wealth reducing when the social value of the deterrence created through litigation is low relative to the costs of litigation. The social value of deterrence is low, in turn, when the productivity of precaution, in terms of accident avoidance, is low – in other words, additional precaution has little or no “bang for the buck”. These general propositions send me on a search for the factual conditions associated with low productivity precaution. The most important ones are inherency of risk and the existence of multiple causal factors. I find the cases are consistent with this precautionary productivity thesis. The immediate implication is that waivers generally are not enforceable or unenforceable according to their language. Waivers are enforceable contextually, conditional on facts indicating inherency of risk or weak causation.

Abstract

We assess the capacity of the U.S. property-liability insurance industry and the efficiency of the state guaranty fund system in response to large scale loss events to assess the resilience of the current system to the growing challenges of climate change. We identify characteristics of the industry’s capital structure and the guaranty fund system that limit the ability to indemnify policyholders following extreme catastrophic losses. We also consider the sustainability of the system over time under assumptions of increasing loss frequency and severity. We find that some attributes of insurance guarantees present short-term problems for policyholders and create long-term challenges for competitive private insurance markets, particularly when a subset of insurers shoulders the burden for past losses.

Abstract

Why do some legal disputes fail to settle?  From a bird’s eye view, the literature offers two categories of reasons.  One consists of arguments based on informational disparities.  The other consists of psychological arguments.  This paper explores the psychological theory.  It presents a model of litigation driven by risk preferences and examines the model’s implications for trials and settlements.  The model suggests a foundation in Prospect Theory for the Mutual Optimism model of litigation.  The model’s implications for plaintiff win rates, settlement patterns, and informational asymmetry with respect to the degree of risk aversion are examined.

Abstract

We study the factors that predict medical malpractice (“med mal”) insurance premia, using national data from Medical Liability Monitor over 1990 to 2017. A number of core findings are not easily explained by standard economic theory. First, we estimate long run elasticities of premia to insurers’ direct cost (payouts plus defense costs), allowing for lags of up to four years, of only around +0.40, when one might expect elasticities near one. Second, state caps on malpractice damages predict a roughly 50% higher ratio of premia to direct costs even though, in competitive markets, a damages cap should affect premia primarily through effect on cost. A difference-in-differences analysis of the “new cap” states that adopted caps during the early 2000’s provides evidence supporting a causal link between cap adoption and the ratio of premium to direct cost. Third, the premium-to-cost ratio, which one might expect to be fairly constant over time, instead varies widely both across states at a given time and within states across time. Our results suggest that insurance companies do not fully adjust revenues to changes in direct costs even over long time periods. Insurers in new-cap states have been able to charge apparently supra-competitive prices for a sustained period.

Abstract

Using hazard analysis, we study whether various physician characteristics, including prior paid claim history, gender, specialty, years of experience, type of degree (M.D. versus D.O.), country of medical school attendance (U.S. versus non-U.S.), and gender) predict future paid medical malpractice (“med mal”) claims, using detailed data on all licensed physicians and all paid claims in Illinois over a 25-year period. This level of granularity is not available using national data. After controlling for other factors, physicians with a single prior paid claim have a four-fold higher risk of future claims than physicians with zero prior paid claims. Male gender, attending a non-U.S. medical school, and practicing in a high-malpractice-risk specialty all predict higher paid claim risk. Paid claim risk is also higher for physicians with 6-15 prior years of experience than for those who are either earlier or later in their careers. We find having an M.D. (rather than a D.O.) is associated with higher paid claim risk, but only in our multiple-failure models.

Abstract

The right to be forgotten, which began as a part of European law, has found increasing acceptance in state privacy statutes recently enacted in the U.S. Commentators have largely analyzed the right to be forgotten as a clash between the privacy interests of data subjects and the free speech rights of those holding the data. Framing the issues as a clash of individual rights largely ignores the important scholarly literatures exploring how giving data subjects the ability to render certain information unobservable can give rise to systemic effects that can harm society as a whole. This Essay fills this gap by exploring what the right to be forgotten can learn from the literatures exploring the implications of adverse selection, moral hazard, and the emerging policy intervention know as ban the box.