Individual or Enterprise Liability? The Roles of Sanctions and Liability Under Contractible and Non-contractible Safety Efforts

Abstract This paper analyzes the social effectiveness of fines (sanctions) and awards (liability) where accident risks are influenced by decisions made by both the enterprise and the employees of the enterprise (individuals). The regulator observes a proportion of accidents and the safety decision of the individual can be contractible or non-contractible for the enterprise. All sanction regimes yield the first best, given contractible individual care. The liability regimes, however, produce sub-optimal solutions. Given non-contractible individual care, the combined use of an individual sanction and an enterprise sanction (joint use) produces the first best. The exclusive use of an individual sanction produces the first best if the enterprise does not suffer any direct harm. The exclusive use of an enterprise sanction does not, however, produce the first best. If both decision-makers are solvent and have similar liability probabilities, then individual and enterprise liability do equally well under contractible individual care. Individual liability does, however, best for non-contractible individual care.