Liability and the incentive to improve information about risk when injurers may be judgment-proof

Abstract

We analyze an injurer’s incentives to improve her information about accident risk. In contrast to the preceding literature, injurers can continuously improve their understanding of the expected harm their activity will impose on others. Regarding social incentives, the marginal benefit from improved risk information is increasing, possibly making either no or a perfect understanding of risk socially optimal. Turning to private incentives when the injurer’s asset constraint is non-binding, strict liability induces the first-best outcome, whereas the negligence rule induces excessive information acquisition. By contrast, when the injurer’s asset constraint is binding, under both liability rules, the injurer’s incentives to acquire information about risk is too small in many circumstances but can also be excessive in other circumstances.