The Benighted Hand Mechanism

Abstract

This paper designs a mechanism that generalizes Judge Learned Hand’s negligence liability tests from his classic opinions in T. J. HOOPER (1932) and CARROLL TOWING (1947). The “Benighted Hand” mechanism incentivizes truthful reporting of the agents’ private costs of bilateral caretaking when agents also face different effectiveness of care and shares of injury costs. In “The Problem of Social Cost” (1960), Ronald Coase noted that Judges may not have the requisite knowledge of the costs of caretaking to determine the optimal level of care, but he and much of the subsequent literature simply treat this problem as a source of exogenous transaction costs. The mechanism design framework treats costs of obtaining private information endogenously, by incentivizing strategic agents to truthfully reveal their private information. The resulting liability schedule is efficient, but not generally compensatory. It allocates the full costs of accidents (including the costs of precaution) equally among the parties.