Barbara Luppi (Università degli studi di Modena e Reggio Emilia) and Francesco Parisi (University of Minnesota Law School) have posted Third-Party Residual Liability on SSRN. Here is the abstract:
This paper develops a three-party accident model in which accident risk is jointly affected by the care and activity levels of injurers and victims, as well as by safety investments made by a third party controlling the external risk environment. We consider a third party residual liability (TPRL) rule under which injurers and victims remain liable for losses caused by their negligence, while the third party bears the residual loss when both parties acted diligently or when their negligence cannot be proven. The first step in our analysis is to show that shifting residual liability onto third parties does not undermine the ordinary care incentives of injurers and victims. The paper then examines three additional effects. First, residual liability induces the third party to use its local information to choose safety investments and formulate customized standards of care. Second, access fees and other pricing mechanisms transmit residual accident costs to users, thereby affecting their activity choices. Third, if residual accident risk is shifted from risk-averse parties to a risk-neutral corporate or institutional third party, a risk-spreading surplus is generated. Competition affects the division of the resulting risk-spreading surplus, but not its existence.
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