50

Allocation of Liability: On the Efficiency of

Composite Sharing Rules
Comment
by

Urs Schweizer*

1 Introduction

Leshem (2017) examines strict liability in an accident model with several injurers
and one victim. A functional form is imposed on the harm function. The legal
regime in place specifies the share of damages that each injurer must bear in case
of an accident. As the main result, a sharing rule is identified, out of the ad hoc
class of composite sharing rules, that provides efficient incentives for all injurers.
In my comment, I first repeat the analysis for a more general model but under the
negligence rule that is the predominant damages regime in the German Civil Code.
Except for liability of animal keepers (§ 833, BGB), strict liability is imposed only
by special laws. Under the negligence rule and in striking contrast to strict liabil-
ity, the exact specification of the sharing rule does not matter from the efficiency
perspective, provided that negligence standards are defined at their efficient levels.
I then argue that, in Leshem’s model, strict liability would lead to the same total
claims as a negligence rule with the appropriate negligence standards. Yet, as these
standards fail to be efficient, my efficiency result no longer applies. Rather, to re-
store efficiency in a negligence regime with inefficient standards, the quantification
of damages would have to be modified. Much flexibility remains as far as the exact
specification of the sharing rule is concerned.

2 Negligence Rules

Injurer i 2 ¹1;:::;N º chooses the probability pi 2 Œ0;1 with which his activity is
safe, and he bears the costs Ci .pi / for it. At precaution profile p D .p1 ;:::;pn /, the
victim suffers from expected harm H.p/  0. Harm is a decreasing function in all
its arguments. The first-best solution p  minimizes the expected social loss, that is,

(1) p  D .p1 ;:::;pN / 2 argmin L.p/ D H.p/ C C1 .p1 / C  C CN .pN /:

p

* University of Bonn, Germany.

Journal of Institutional and Theoretical Economics 173, 50–53 – ISSN 0932-4569

DOI: 10.1628/093245616X14743741664791 – © 2017 Mohr Siebeck
(2017) Allocation of Liability 51

Under the negligence rule, injurer i faces the efficient negligence standard pi ,
and hence he is held liable only if his precaution falls short of this standard. Let
Di .p/ denote party i ’s share of damages owed to the victim at actual precaution
profile p . If party i meets his standard, then he is not held liable, that is, he owes
zero damages,

(2) Di .pi ;pi / D 0;

no matter what precautions pi are chosen by the other injurers.

At precaution profile p , the victim is entitled to damages H.p/  H.p  / (or
more), which makes her (at least) as well off as if the obligation profile were met.
The shares of all injurers must, at least, add up to the victim’s claim, that is,

(3) D1 .p/ C  C DN .p/  H.p/  H.p  /

must hold at any precaution profile p .

Any such damages regime leads to the N -person game with strategy profiles
p 2 Œ0;1N and with loss functions Ci .pi / C Di .p/ for parties i D 1;:::;N . A Nash
equilibrium p N D .p1N ;:::;pNN / consists of mutually best responses, that is,

piN 2 argmin Ci .pi / C Di.pi ;pi

N
/
pi

for i D 1;:::;N . The following proposition holds independent of the exact specifi-
cation of the sharing rule.
Proposition Suppose the negligence standards are fixed at their efficient levels
and damages are shared in any way such that (2) and (3) are met. Then the efficient
profile p  is a Nash equilibrium of the above game.
This result is a special case of Proposition 1 in Schweizer (2005). For conven-
ience, I repeat its proof here. Let
X
Li .pi ;pi

/D 
Cj .pj  / C H.pi ;pi /  Di .pi ;pi

/
j ¤i

denote the net loss as expected by the coalition of the victim and all injurers but
i at profile .pi ;pi

/. It then follows from (2) and (3) that Li .pi ;pi

/  Li .p  /
must hold. In fact, at this profile, party i must cover the victim’s claims on his own.
If combined with (1), it follows that

L.pi ;pi /  Li .pi ;pi

/  L.p  /  Li .p  /

must hold for any pi , that is, party i ’s net loss L.pi ;pi

/  Li .pi ;pi

/ is lowest
at pi , and hence pi is a best response by party i to pi . As this holds for any
  

i , the efficient profile p  must be a Nash equilibrium indeed. The proposition is

established.
52 Urs Schweizer JITE 173

Leshem, in contrast, imposes a functional form on the harm function,

H.p/ D w  .1  p1 p2 pN / C .1  w/  .1  p1/.1  pN /;

for which H.1;:::;1/ D 0 holds. Accident models where harm occurs with positive
probability, no matter what precautions have been taken, are not considered.
Moreover, Leshem specifies a sharing rule (out of the ad hoc class of composite
sharing rules) such that, at the efficient profile p  , the first-order conditions of the
Nash equilibrium are satisfied. For the first-order approach to work, restrictions on
the cost functions are required and courts must be able to do a lot of fine tuning.
Strict liability is related to a negligence rule, but with an obligation profile
p s D .p1s ;:::;pNs / that fails to be efficient. By assumption, at precaution profile
p s D .1;:::;1/, the expected harm amounts to H.p s / D 0, and hence the victim’s
total claim under strict liability at the actual precaution profile p amounts to

H.p/ D H.p/  H.p s /  0

and is equal to her claim under the negligence rule with standards p s . Yet, as the
standards p s fail to be efficient, the above proposition does not apply.
In my own contribution on efficient compensation to this volume (Schweizer,
2017), I have identified efficient damages regimes for three-party relationships,
including the case of two injurers imposing harm on the victim as the third party
and where one of the parties faces an inefficient obligation. As it turns out, efficient
incentives still prevail if damages owed by the party that breaches efficiently are
quantified as if the other party had reached the efficient decision, even if, actually,
he has not (reasonable-person standard).
The argument can be extended to several injurers who face the inefficient obli-
gation profile p s as follows. At precaution pi , party i owes damages

Dis .pi / D H.pis ;pi

 
/ C H.pi ;pi /0

to the victim, independent of actual precautions pi by the other injurers. Under
this damages regime, the net loss of the coalition of the victim and all injurers but
i amounts to
X X
Lsi .pi ;pi

/D Cj .pj / C H.pi ;pi

/  Dis .pi / D Cj .pj / C H.pis ;pi

/;
j ¤i j ¤i

independent of pi . Therefore, if the other injurers play pi 

, then party i becomes
residual claimant and hence pi is a best response to pi . The efficient reference
 

profile still constitutes a Nash equilibrium.

Again, much flexibility in how to share damages would be left. In fact, under
any modification Dis .pi / C i .p/ of damages such that i .pi ;pi 
/  i .p  / holds
for all i and all pi , the efficient reference profile p remains a Nash equilibrium.

(2017) Allocation of Liability 53

3 Conclusion

I have interpreted strict liability as a negligence rule with inefficient negligence

standards. To maintain efficient incentives nonetheless, I have proposed to quan-
tify damages based on a reasonable-person standard. From a legal perspective, this
solution has problems of its own, as a reasonable person would have to breach his
inefficient obligation, which a rational person would be willing to do but which, on
moral grounds, a reasonable person may be expected not to do.

References

Leshem, S. (2017), “Allocation of Liability: On the Efficiency of Composite Sharing Rules,”

Journal of Institutional and Theoretical Economics (JITE), 173(1), 25–43.
Schweizer, U. (2005), “The Pure Theory of Multilateral Obligations,” Journal of Institutional
and Theoretical Economics (JITE), 161(2), 239–254.
— (2017), “Efficient Compensation: Lessons from Civil Liability,” Journal of Institutional
and Theoretical Economics (JITE), 173(1), 54–70.

Urs Schweizer
IAME/BGSE
University of Bonn
Kaiserstr. 1
53113 Bonn
Germany
schweizer@uni-bonn.de
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