Economic Theory Seminar - Giridhar Parameswaran (Haverford College)

Title: A Theory of Objective Standards of Care

Abstract: Why is what a reasonable person would do the standard for assessing whether an individual’s actions should result in liability? To answer this question, we develop a model where two actors must decide how much to invest in accident prevention. Each actor knows their own cost, but is ignorant of their counter-party’s. Where coordination is critical, the court prefers to hold actors to a standard associated with some average cost, rather than a standard targeted to what is, in fact, the actor’s true cost—a cost the court knows perfectly. Further, the court find it optimal to mesh the objective standard with a path towards forgiveness for the least able actors. Finally, we demonstrate that the appropriateness of objective standards turns on whether care decisions are complements or substitutes. Throughout, we show how many otherwise puzzling legal rules and doctrine are consistent with the predictions of the model.