Working Paper: NBER ID: w12578
Authors: Darius Lakdawalla; Eric Talley
Abstract: This paper analyzes the normative role for civil liability in aligning terrorism precaution incentives, when the perpetrators of terrorism are unreachable by courts or regulators. We consider the strategic interaction among targets, subsidiary victims, and terrorists within a sequential, game-theoretic model. The model reveals that, while an "optimal" liability regime indeed exists, its features appear at odds with conventional legal templates. For example, it frequently prescribes damages payments from seemingly unlikely defendants, directing them to seemingly unlikely plaintiffs. The challenge of introducing such a regime using existing tort law doctrines, therefore, is likely to be prohibitive. Instead, we argue, efficient precaution incentives may be best provided by alternative policy mechanisms, such as a mutual public insurance pool for potential targets of terrorism, coupled with direct compensation to victims of terrorist attacks.
Keywords: Terrorism; Liability; Precaution; Insurance
JEL Codes: K13
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| optimal liability system (K13) | improve precautionary incentives against terrorism (H56) |
| threat of liability (K13) | influence targets' decisions to enhance safety measures (D91) |
| liability claims (K13) | complicate incentive structure (M52) |
| targets' overinvestment or underinvestment in protection (G31) | based on actions of other targets and behavior of victims (D91) |
| optimal liability regime (K13) | require targets to internalize losses of victims (K13) |