Chapter

Higher-Order Liability Rules

Ian Ayres

in Optional Law

Published by University of Chicago Press

Published in print June 2005 | ISBN: 9780226033464
Published online February 2013 | e-ISBN: 9780226033488 | DOI: http://dx.doi.org/10.7208/chicago/9780226033488.003.0005
Higher-Order Liability Rules

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This chapter analyzes higher-order liability rules that allow a series of reciprocal takings by the litigants. It shows that second-order liability rules (sometimes also referred to as “unconstrained dual-chooser” rules) can harness information of both litigants in more refined ways than either the single or dual-chooser rules. Indeed, if the takings are costlessly implemented, a sequence of reciprocal takings can mimic an auction that produces first-best allocative efficiency—even in the presence of asymmetric information. The chapter illustrates how courts can optimally tailor second- and higher-order damages, explains how one can view liability rules with reciprocal-takings options as forming a class of “internal” auctions, discusses the relative efficiency of second- and higher-order liability rules, and describes how to apply the “dispositive-takings principle” to optimally select damages. Finally, it provides an application of second-order rules to the problem of the efficient dispositive-takings principle.

Keywords: higher-order liability rules; reciprocal takings; second-order liability rules; allocative efficiency; internal auctions; dispositive-takings principle; damages

Chapter.  11187 words.  Illustrated.

Subjects: Econometrics and Mathematical Economics

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