44

Allocation of Liability: On the Efficiency of

Composite Sharing Rules
Comment
by

Florian Baumann*

1 Introduction

In Leshem (2017), the author considers a scenario in which the activities of several
potential injurers may jointly cause harm. Potential injurers are symmetric, and the
main analysis is concerned with the case of two injurers. Whereas injurers’ activity
levels are given, each injurer can exert care in order to reduce the accident probabil-
ity, where costs of care are convex. The inputs of injurers’ care levels translate into
the output of a lower probability for harm. The author uses a neat characterization
of the precaution technology to allow care levels to be substitutes, complements,
or anything in between.
A first-best solution requires for each injurer that the marginal costs of care be
equal to the marginal reduction in expected harm. From standard economic reason-
ing it is clear that the efficient outcome could be established in at least two ways:
(i) each injurer is confronted with the full expected harm or (ii) one establishes a
negligence rule based on due-care standards according to the efficient care levels.
In the article, however, attention is focused on a rule of strict liability in which the
sum of damages payments by all potential injurers is restricted to equal the level
of harm. In this context, the author looks at a specific sharing rule for damages,
which is a convex combination of an equal allocation of damages to injurers and
an allocation according to the relative carelessness of each injurer. The definition
of relative carelessness resembles a Tullock contest.
For two injurers, the author establishes that the first-best can be implemented by
an adequate configuration of the composite sharing rule. The weight assigned to the
damages calculated according to proportional carelessness increases in the degree
of substitutability between injurers’ care levels. In addition, for more than two in-
jurers it is established that with care levels that are pure substitutes (complements)
the optimal weight for the damages allocated proportional to relative carelessness
increases (decreases) in the number of injurers.

* Center for Advanced Studies in Law and Economics (CASTLE), University of

Bonn, Germany.

Journal of Institutional and Theoretical Economics 173, 44–49 – ISSN 0932-4569

DOI: 10.1628/093245616X14743741664755 – © 2017 Mohr Siebeck
(2017) Allocation of Liability 45

In my comment, I want to address three points. First, I want to hint at another

strand of literature related to the topic at hand: private provisions for a public good.
Second, an alternative way for presenting some of the results is suggested. Finally,
I want to briefly outline a possible avenue for a further extension of the model.

2 A Related Strand of Literature

The problem at hand can be compared to the economics of public-good provision,

which is related to the general topic of positive externalities (see, e.g., the early
and seminal contribution by Samuelson, 1954). For the group of potential injur-
ers, the public good consists in the overall safety of their joint activities, and the
contributions to this public good are given by each injurer’s care expenditures.
The public-good character of overall safety is most apparent for an allocation of
damages according to equal shares for all injurers. In this case, overall safety is
nonrival, since each injurer benefits from higher contributions to safety by any in-
dividual. Furthermore, given equal shares of liability, no injurer is excluded from
the benefits generated by additional care investments. From early on, providing in-
centives for efficient private contributions to a public good has been identified as a
basic economic problem (see, e.g., Bergstrom, Blume, and Varian, 1986).
In the article by Mr. Leshem, the problem of insufficient private contributions
to the public good is solved by amending the game by a contest, the outcome
of which co-determines liability shares. This idea can be related to some litera-
ture on the provision of public goods in general. Morgan (2000) discusses the idea
of combining the financing of a public good with a lottery. Lotteries share many
features of a contest; the own success probability depends on the own contribu-
tion (number of tickets bought) relative to overall contributions (the overall num-
ber of tickets bought by all participants). The idea is developed further by Maeda
(2008), who investigates the optimal design of lotteries in such a scenario. An-
other, more recent contribution to this field is provided by Kolmar and Wagener
(2012), who also point out the idea of combining the positive externalities of con-
tributions to a public good with negative externalities stemming from a contest,
in order to instill efficient incentives. Rather than the production of safety, their
main example involves the production of knowledge by research and the contest
for private rents like academic positions achieved by better research performance.
Consequently, some important differences in the setups investigated remain. For
example, whereas the prize awarded in the contest in Kolmar and Wagener (2012)
can be chosen independently of the obtained contributions to the public good, in
the setup discussed by Mr. Leshem the implicit prize (the lower expected damages
payment) directly depends on the overall safety investments by the injurers. Fur-
thermore, while Mr. Leshem considers identical individuals, the focus in Kolmar
and Wagener (2012) is on individuals differing in their productivity, which allows
the authors to analyze the selection problem of who should contribute to the public
good in the first place. Nevertheless, the literature on the private provision of pub-
46 Florian Baumann JITE 173

lic goods may be worth discussing, especially as the mechanism of introducing a

contest to encourage higher contributions is well established.

3 An Alternative Representation of the Results

The author uses a very nice way to convey intuition for his results by referring to
the scale elasticity of expected harm with respect to injurers’ carelessness. In this
section, I want to propose another possible presentation of the results, which may
be considered as some kind of shortcut, since it relies directly on care levels and
the notion of positive and negative externalities. Here, I restrict attention to the case
of two potential injurers.
As pointed out by the author, private incentives for taking care are efficient for
injurer i , i D 1;2, if expected damages of the other potential injurer are not affected
by the care choice of injurer i . In the two-injurers context, injurer j ’s expected
damages D j amount to (j D 1;2, j ¤ i )

D j .p1 ;p2 ;˛/ D Rj .p1 ;p2 /H.p1 ;p2 /

 
1  pj 1
D ˛ C .1  ˛/ .w.1  pi pj / C .1  w/.1  pi /.1  pj //:
2  pj  pi 2

Taking the derivative with respect to pi and concentrating on the equilibrium out-
come pi D pj D p , we obtain for a pure proportional damages allocation, ˛ D 1,
ˇ
@D j .p1 ;p2 ;1/ ˇˇ 1
ˇ D  .1  p/.1  2w/;
@pi pi Dpj Dp 4

whereas for a damages allocation according to equal shares, ˛ D 0,

ˇ
@D j .p1 ;p2 ;0/ ˇˇ 1 1
ˇ D  .1  p/.1  w/  pw < 0
@pi pi Dpj Dp 2 2

is obtained. That is, the equal-sharing rule implies that care taking by an injurer cre-
ates a positive externality for the other injurer (reduces his/her expected liability)
for any feasible precaution technology (0  w  1). In contrast, and corresponding
to Corollary 1 in the paper, with damages allocated proportionally to carelessness,
the type of externality depends on the specifics of the precaution technology (pos-
itive externality for w < 1=2; no externality for w D 1=2; negative externality for
w > 1=2).
The final step to establish the optimal weight for the share of damages allocated
according to proportional carelessness is to require that positive and negative ex-
ternalities cancel each other out. That is, the optimal weight ˛  follows from
ˇ ˇ
@D j .p1 ;p2 ;1/ ˇˇ j ˇ
 @D .p1 ;p2 ;0/ ˇ
˛ ˇ D .1  ˛ / ˇ ;
@pi pi Dpj Dp @pi pi Dpj Dp
(2017) Allocation of Liability 47

so that ˛  is equal to
2w
˛ D 2  :
1  p C 2pw

For example, if w D 1 (i.e., care levels are pure complements), damages shar-
ing according to proportional carelessness implies a negative externality between
potential injurers. Accordingly, the optimal weight ˛  D 2p=.1 C p/ is strictly be-
tween zero and one to ascertain balancing out the positive and negative external-
ities. For w D 1=2 (independent care levels), the optimal weight is ˛  D 1, which
follows directly from Corollary 1 because no externality is associated with damages
sharing proportional to carelessness. For w D 0 (i.e., care levels are pure comple-
ments), both allocations of damages involve positive externalities between injurers.
Accordingly, a negative weight is applied to the equal-sharing part, resulting in a
negative externality between injurers, just offsetting the positive externality due to
the proportional part of damages.

4 Avenues for Extending the Model?

In my last comment, I want to discuss possible extensions to the already rich frame-
work considered by Mr. Leshem. As usual, one might think about the simplifying
assumptions used in the model and how results may change in a more general
framework. A starting point for the discussion could be seen in the fact that, given
the assumptions applied in the model, an efficient allocation can be obtained as a
Nash equilibrium by using a negligence rule instead of the strict liability rule in-
vestigated in the paper. In the paper, it is demonstrated that with a sophisticated
composite sharing rule, first-best incentives for taking care can be provided. How-
ever, the same result could also be established by an appropriate negligence rule
with the due-care level set equal to efficient care. Indeed, on assigning full liability
to an injurer who undercuts the due-care level, efficient care by all potential injur-
ers constitutes a Nash equilibrium of the game (see, e.g., Kornhauser and Revesz,
1989). It remains an open issue whether one of the two liability regimes is prefer-
able. Within the model’s framework, no distinction can be made from a welfare
perspective.1
The textbook models on tort law offer – inter alia – two main explanations why
strict liability may be preferred to a rule of negligence (see, e.g., Shavell, 1987).
The first one is “secondary” costs of torts when taking into account individuals’ risk

1 In the standard model of torts, one reason for preferring strict liability over negli-
gence could be that the court is not in a position to observe care taken or is not able to
determine efficient due-care levels. However, in the model at hand, for the court to apply
the optimal composite sharing rule the same information is required as would be needed
for application of the negligence rule. With the composite sharing rule, damages are partly
allocated according to relative carelessness, and the optimal weight ˛  may depend on
the efficient care level.
48 Florian Baumann JITE 173

aversion. In this respect, strict liability is typically preferred to a rule of negligence

if the injurer is less risk-averse than the potential victim. Since in the framework
used by Mr. Leshem no assumptions are made with respect to the victim, such
a consideration could be easily accommodated. The second and probably more
interesting extension could consider injurers’ activity choice, i.e., the decision of
potential injurers whether or not to perform the activity at all. As strict liability
confers more costs on the injurers than does negligence, the liability regime should
directly affect the number of potential injurers, which is denoted by N in the model.
Taking the model at face value, a possible extension to include an endogenous
number of potential injurers might be to introduce a function F .N /, F 0 .N / > 0 >
F 00 .N /, which describes the gross benefits from the activity performed by the in-
jurers. Then, social welfare is given by

X
N

SW D F .N /  C.pi /  H.p/;
i D1

where p D .p1 ;p2 ;:::;pN /. In an equilibrium, in which efficient care levels are es-
tablished by the liability rule, we obtain
 
dSW @SW @H
D D F 0 .N /  C.p/ C ;
dN @N @N
where the envelope theorem has been applied. Interestingly, the sign of @H=@N
depends on the care technology. The relevant derivative amounts to
@HC
D p N logŒp > 0
@N
if care levels are perfect complements, and
@HS
D .1  p/N logŒ1  p < 0
@N
if they are perfect substitutes. Accordingly, at first glance, in order to instill efficient
incentives with respect to activity, injurers should bear some costs in addition to in-
dividual care costs if care levels are perfect complements, whereas they should bear
less than their costs of care if care levels are perfect substitutes. A more thorough
investigation of these aspects might be a worthwhile topic for future research.

References

Bergstrom, T., L. Blume, and H. Varian (1986), “On the Private Provision of Public Goods,”
Journal of Public Economics, 29(1), 25–49.
Kolmar, M., and A. Wagener (2012), “Contests and the Private Production of Public Goods,”
Southern Economic Journal, 79(1), 161–179.
Kornhauser, L. A., and R. L. Revesz (1989), “Sharing Damages among Multiple Tortfea-
sors,” The Yale Law Journal, 98(5), 831–884.
(2017) Allocation of Liability 49

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

Journal of Institutional and Theoretical Economics (JITE), 173(1), 25–43.
Maeda, A. (2008), “Optimal Lottery Design for Public Financing,” The Economic Journal,
118(532), 1698–1718.
Morgan, J. (2000), “Financing Public Goods by Means of Lotteries,” The Review of Eco-
nomic Studies, 67(4), 761–784.
Samuelson, P. A. (1954), “The Pure Theory of Public Expenditure,” The Review of Eco-
nomics and Statistics, 36(4), 387–389.
Shavell, S. (1987), Economic Analysis of Accident Law, Harvard University Press, Cam-
bridge (MA).

Florian Baumann
Center for Advanced Studies in
Law and Economics (CASTLE)
University of Bonn
Adenauerallee 24–42
53113 Bonn
Germany
fbaumann@uni-bonn.de
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