Driving with the Brakes on: Guido Calabresi's Failed 1970 Auto Insurance Case Against Safety-Device Mandates

Abstract

Guido Calabresi's book, THE COSTS OF ACCIDENTS, gives two contrasting examples which together prove that efficient decisions about car safety devices must be guided by individual costs. Part I of this essay reviews Calabresi's demonstration that, if charged accurate insurance costs, Taney would invest in improved brakes and Marshall would not. To show why this demonstration fails to inform debates over safety-device mandates, Part II builds a model composed of high-annual-miles Taney cars and low-annual-miles Marshall cars, which traditional insurance would not differentiate. But pooling cars driven different annual miles overwhelms safety-device savings from reduced risk per mile. Although Calabresi uncritically identifies insurance as a cost of car owning, the model shows why decisions instead must be guided by two interdependent variables that together would make insurance an operating cost. One is the continuous odometer-mile exposure unit variable for measuring individually how much each car is operated. The other is the cents-per-mile risk rate variable for measuring by category how cars are operated, e.g., driver-age and safety-device categories. To explain why insurers shun cents-per-odometer-mile prices, Part III reviews marketing decisions to disregard categories that would raise premiums for some high-annual-miles cars. The essential first step toward redeeming Calabresi's free-market approach to automobile accidents is to acknowledge that insurance charged as a cost of car owning produces nothing but wrong incentives for optimizing the costs of accidents.