Efficient liability law with costly insurance

Luigi Alberto Franzoni (University of Bologna)

Abstract

This paper revisits the normative foundations of liability law by exploring its
risk-allocation properties. It builds on the realistic assumption that parties are
averse to risk and that insurance is costly. Risk aversion and costly insurance
advocate for a higher standard of care under negligence and for larger damage
awards under strict liability. When the victim can suffer concomitant harms and
is not insured, the standard of care and the damage awards increase with the
degree or correlation across harms.

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