Research Seminar MicroeconomicsThe Case Against Collective LiabilityJohn Shahar Dillbary (University of Alabama)

9 January 2020

The Microeconomics Research Seminar welcomes John Shahar Dillbary (University of Alabama), who will present his project

"The Case Against Collective Liability".
Place: VMP 9, S28

Hour: 17:15 - 18:45
We are looking forward to seeing you there!

Abstract

Legislators, courts, and market players often impose collective liability if they believe that the unidentified culprit is a member of the group. The canonical example is a case like Ybarra - a surgery gone wrong. The court held the entire surgical team liable although it was clear that some were faultless. Surprisingly, despite its ubiquitous nature, the economic literature on collective liability remains sparse. This literature justifies the imposition of collective liability on two grounds. The first is deterrence. The claim is that ex ante the threat of collective liability will incentivize members of the group to cross monitor each other and take care. The second justification is that ex-post collective liability serves an information-forcing function. The argument is that to exculpate themselves, innocent members will produce and divulge information that will identify the true culprit.
Using the same canonical example, this article shows that the economic justifications for collective liability are exaggerated at best and, in some cases, faulty. Specifically, the article reveals that collective liability can incentivize defendants to lie or suppress information that would identify the responsible parties. Collective liability can even erode the incentive to take care, adversely impact activity levels, and reduce the actors’ incentive to cross-monitor each other. Moreover, the article shows that collective liability allows service providers to engage in new forms of defensive and offensive practices that to date have gone unnoticed. The article concludes with a proposal that would minimize such strategic behaviors and reduce the determinantal effect of collective liability.