How Does Liability Affect Prices? Railroad Sparks and Timber

This paper analyzes how judicially-determined liability assignments affect valuations and prices. On two occasions in 2007, a railway company caused a fire to break out in the State of Washington. The two fires burned down some of the neighboring properties’ timber. These two incidents led to two companion court cases that made it all the way to the Washington Supreme Court. The court rulings, both made on May 31, 2012, hold that the railway company was not liable for timber damages under Washington’s timber trespass statute, despite having acted negligently. As a consequence of these decisions, economic theory predicts a decrease in the value of timber in those areas associated with higher risk of fire, and an increase in the value of Washington railway companies. Using a triple difference model and an event study, we test and find evidence supporting this prediction