Strict Liability, Capped Strict Liability, and Care Effort under Asymmetric Information

This paper compares the effectiveness of regimes of strict liability and capped strict liability in an agency relationship among a regulatory agency and operators of risky activities. Under an assumption of double asymmetric information (wealth and efficiency in care effort), it shows that capping liability is more efficient than keeping with strict liability, this at the price of an informational rent. Efficiency means that the efficient agent supplies the level of safety effort equivalent to that in the first-best solution. At the optimum, the rent is minimized by the efficient contract supplied by the principal.