Decomposition of Accident Loss and Efficiency of Negligence Rule

Negligence rule is one of the most widely used liability rules for apportioning accident loss between victim and injurer. Under the negligence rule the entire accident loss is borne by the injurer if he is negligent; and the entire accident loss is borne by the victim if the injurer is nonnegligent. Injurer is negligent if his care level is less than the due care level; and nonnegligent otherwise. If the due care level for the injurer is chosen appropriately then the negligence rule has the property of inducing both victim and injurer to take care levels which result in the minimization of total social costs. In other words, if the due care level is chosen appropriately then the negligence rule is an efficient liability rule. While negligence rule is efficient, the apportionment of loss under it has an all-or-none character. If injurer is negligent then the entire loss is borne by him; and if he is nonnegligent then the entire loss is borne by the victim. The purpose of this paper is to investigate whether distributive considerations can be brought in without affecting the efficiency of negligence rule. It so turns out that in providing correct incentives to the parties, part of accident loss, equal to the optimal loss when both parties are taking care at levels at which total social costs are minimized, suitably adjusted to take into account differing probabilities of accident with different care levels, seems to play no role and can therefore be apportioned between the two parties independently of their care levels. It is the apportionment of the accident loss over and above the adjusted optimal loss which turns out to be crucial from the point of view of providing correct incentives to the parties