Ambiguity and Accident Law
Journal of Public Economic Theory
Wiley for Association for Public Economic Theory
This is the author accepted manuscript. The final version is available from Wiley via the DOI in this record.
Reason for embargo
Environmental accidents often involve ambiguous risks, i.e., the relevant probabilities are unknown. This paper studies how liability rules are affected by ambiguity. The injurer and the victim choose a level of care, which is observable, and an unobservable action. Both actions may affect the size and/or likelihood of loss. We analyze the welfare implications of tort rules. First, we show that with ambiguity, negligence is likely to perform better than strict liability. Second, we propose a tort rule of negligence and punitive damages, which gives the efficient levels of both care and unobserved actions.