Liability Rules, Limited Information, and the Role of Precedent

Recent studies of the role of law in distributing accident costs have led to the pessimistic conclusion that because judges lack the information to discover the efficient level of care, efficiency cannot be achieved by common law tort rules. We show that judges have enough information to revise the legal standard via the mechanism of precedent so that the standard adopted tends toward efficiency. This optimistic conclusion results from changing previous models so that the level of care taken by litigants affects the information available to the court, but does not directly influence the legal standard. We model a sequence of court decisions by differential equations and show that the unique, stable equilibrium is efficient.