Essays on the economics of vicarious liability

This dissertation, a compilation of three essays, investigates the economic efficiency of vicarious liability relative to direct liability when the former is used to solve the judgement-proof problem. The first essay analyzes how the relative bargaining power of the principal and agent affects vicarious liability's efficiency in preventing accidents when the agent is judgement-proof. When the agent has no bargaining power, vicarious liability induces a more efficient level of care than direct liability when the agent is judgement-proof. In addition, it is shown that the preventive care induced by vicarious liability increases as the agent's bargaining power increases.;The second essay investigates the accident-preventing efficiency of various liability rules when the principal can monitor the agent's care. It is shown that strict vicarious liability induces the same level of preventive care as strict joint liability and collusion-proof negligence. The paper also investigates the efficiency of vicarious liability when the principal's level of monitoring is endogenous. It is shown that vicarious liability induces monitoring if the agent is sufficiently judgement-proof and if monitoring is not too expensive. In addition, preventive care when monitoring is possible is at least as great (and often greater) than that induced without monitoring. Finally, it is shown that the principal does not gain by using ex post investigation instead of ex ante monitoring.;The third essay explores two tactics firms use to avoid vicarious liability: the Independent Contracting (IC) Rule and the ERISA Preemption Clause. This paper shows that the use of a judgement-proof independent contractor to avoid liability leads to insufficient accident-preventing care. It is shown that the exceptions to the IC rule are justifiable, both ex ante and ex post, on efficiency grounds. This paper also shows that, under the protection of ERISA, a health maintenance organization will not only authorize too few medical tests and procedures, but will require an insufficient level of care from the physician. This result is generalized to dispel the belief that direct liability induces excessive care in avoiding an accident while producing too little output.