Loss Sharing between Non-Negligent Parties

Abstract

In this paper, we study the effects and desirability of legal rules that allow the sharing of an accident loss between a non-negligent injurer and his non-negligent victim. In order to identify the virtues and limits of loss-sharing rules, we begin by considering the effect of a loss-sharing regime on parties' incentives. We address an unresolved issue in the literature, exploring whether loss-sharing in equilibrium undermines the parties' primary care incentives. We establish the conditions under which loss-sharing may be desirable and characterize the regime providing the best overall incentives to minimize the social cost of accidents. Our results indicate that loss-sharing may indeed be desirable in a vast range of situations. The results are later extended to consider the effect of parties' uncertainty in a loss-sharing regime and reveal that loss-sharing may at the same time be desirable and unnecessary in real-life accident law.