Economic Analysis of Liability Rules pp 63-77 | Cite as

# Decoupled Liability and Efficiency

## Abstract

A basic feature of tort law is that of coupled liability. Liability is said to be ‘coupled’ if the liability imposed on the injurer equals payment to the victim and to be ‘decoupled’ if the two amounts are unequal. The ‘coupled liability’ feature of tort law is incorporated in the very definition of a liability rule by having the shares of loss borne by the two parties sum to one. In this chapter, the relationship between the ‘coupled liability’ feature of tort law and efficiency is investigated. It is shown that coupled liability is necessary for efficiency, i.e. if a rule is such that it invariably gives rise to efficient outcomes then it must be the case that under it the liability is coupled. In other words, no rule with decoupled liability can be such that it invariably yields efficient outcomes. A corollary of the result establishing necessity of coupled liability for efficiency is that the rule under which the injurer pays tax equal to the harm and the victim bears his loss is not an efficient rule. This rule, however, has an interesting property, namely, that under it the configuration of due care levels is always a Nash equilibrium. A rule under which the configuration of due care levels is always a Nash equilibrium is termed a quasi-efficient rule. A complete characterization of quasi-efficient rules is also obtained in this chapter.

## Keywords

Nash Equilibrium Efficient Outcome Impossibility Theorem Externality Problem Liability Rule## References

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