Effects of Courts' Errors on Efficiency of Liability Rules: When Individuals are Imperfectly Informed

Efficiency property of liability rules when courts make errors in estimation of the harm suffered by the victim is studied. Effects of courts' errors on parties' behaviour regarding the levels of care they take to prevent the accident and their decisions to buy information about courts' errors are analyzed. A condition called negligent injurer's liability is introduced. When courts make upper-biased errors, condition negligent injurer's liability is shown to be necessary and sufficient for a simple liability rule to motivate the parties to take efficient care and simultaneously not to spend on information. The notion of simple liability rules is also introduced. Analysis is carried out in a quite broader framework. In particular, the standard assumption that costs of care and expected loss functions are such that total costs of accident are minimized at a unique configuration of care levels is relaxed.