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Economic Theories on Threshold Rules - Dictionary of Arguments

Parisi I 14
Threshold rules/economics theories/Miceli: Example: The negligence rule (...) induces efficient prevention by both injurers and victims because it combines the two methods for creating efficient incentives. Specifically, it sets a threshold level of care so that the injurer can avoid liability by meeting the threshold (...), and it simultaneously imposes full damages on the victim, thus eliminating the moral hazard problem. >Tort law/Learned Hand.
[This] (...) argument illustrates the superiority of negligence over strict liability in bilateral accident settings, but the logic of the argument has implications beyond tort law. In particular, it reveals the general usefulness of “threshold rules” for creating bilateral incentives. (...) the problem with a rule of strict liability was that the awarding of compensation to victims eliminates any incentives for them to avoid the accident because they (theoretically) expect to be made whole.* This problem is a consequence of the dual function of liability to deter dangerous activities and to compensate victims of those activities.
Parisi I 15
Deterrence and compensation are perfectly compatible when only injurers can take precaution (as in the unilateral care model), but when victims can also take precaution, the compensatory and incentive functions come into conflict, a situation that Cooter (1985)(1) refers to as the “paradox of compensation.” >Compensation/Cooter.
Solution: The brilliance of the negligence rule is that it resolves this paradox by establishing a standard of behavior that the injurer can meet to avoid liability, thereby giving the victim an incentive to invest in precaution so as to minimize her own damages.

*A symmetric argument applies to a rule of "no liability," which creates incentives for victims to take care but not injurers. The bilateral care model thus reveals the symmetry between strict and no liability, as epitomized by the "least cost avoider" approach to liability, as well as the superiority of negligence.

1. Cooter, Robert (1985). “Unity in Tort, Contract, and Property: The Model of Precaution.” California Law Review 73: 1–51.

Miceli, Thomas J. „Economic Models of Law“. In: Parisi, Francesco (ed) (2017). The Oxford Handbook of Law and Economics. Vol 1: Methodology and Concepts. NY: Oxford University Press.

Explanation of symbols: Roman numerals indicate the source, arabic numerals indicate the page number. The corresponding books are indicated on the right hand side. ((s)…): Comment by the sender of the contribution. Translations: Dictionary of Arguments
The note [Author1]Vs[Author2] or [Author]Vs[term] is an addition from the Dictionary of Arguments. If a German edition is specified, the page numbers refer to this edition.
Economic Theories
Parisi I
Francesco Parisi (Ed)
The Oxford Handbook of Law and Economics: Volume 1: Methodology and Concepts New York 2017

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