3. The Structure of Efficient Liability Rules

This chapter analyses the totality of all liability rules from the efficiency perspective. An analysis of all liability rules shows that a liability rule is efficient if and only if it satisfies the condition of negligence liability and the requirement of non-reward for over-nonnegligence. Negligence liability requires that if one party is exactly nonnegligent and the other party is negligent, then the negligent party must be liable for the entire loss. The requirement of non-reward for over-nonnegligence requires that if one party is exactly nonnegligent and the other party is over-nonnegligent, then the over-nonnegligent party’s liability share must not be less than what it would be if both parties were exactly nonnegligent. A party is defined to be negligent if the care taken by it is less than the due care, exactly nonnegligent if the care taken by it is equal to the due care, and over-nonnegligent if the care taken by it is in excess of the due care. For the purpose of assigning liability, in tort law, as a general rule, no distinction is made between taking the due care and taking more than the due care. The incorporation of this feature into the analysis results in negligence liability emerging as the sole characterizing condition for efficiency. An analysis of the no distinction between the due care and more than the due care feature shows that it cannot be explained solely in terms of efficiency. If one considers the subclass of efficient rules satisfying monotonicity, a condition which can be interpreted as formalization of an aspect of fairness, then it turns out that every liability rule in this subclass has the property of making no distinction between the due care and more than the due care. On the basis of this result, it can be argued that the tort law feature of making no distinction between the due care and more than the due care is partly grounded in fairness and partly in efficiency.