Loss-Sharing between Nonnegligent Parties

Shavell (1980) established that tort regimes fail to incentivize optimal activity levels. The bearer of residual loss adopts a socially optimal activity level; however, the nonbearer of residual loss will adopt an excessive level. We explore alternative liability rules, which distribute the cost of accidents between nonnegligent parties, effectively rendering injurer and victim partial residual bearers of loss. We introduce a bilateral accident model with care and activity levels, assuming risk neutrality. We determine conditions where loss-sharing for nonnegligent torts may be an alternative for policymakers, and analyze the social cost of accidents under shared-liability regimes. We extend our analysis to account for role uncertainty of the parties and real-world implications for tort law.