Investors' Recovery Friction and Auditor Liability Rules

1999 ◽  
Vol 74 (2) ◽  
pp. 225-240 ◽  
Author(s):  
Suresh Radhakrishnan
Keyword(s):  
Strict Liability ◽  
Legal Liability ◽  
Liability Rules ◽  
Auditor Liability ◽  
Second Best ◽  
Contingent Fee ◽  
Litigation Cost

This paper examines investor welfare under two different liability regimes for holding auditors liable for investor losses, the due care and the strict liability regimes. In both regimes, the investor pays the expected legal liability cost to the auditor, and a portion of any subsequent damages awarded by the court is retained by the lawyer as a contingent fee, which is called the recovery friction. This study finds that the presence of the recovery friction leads to second-best efforts by the auditor and the manager. Investor welfare in the due care regime is higher than in the strict liability regime because the expected litigation cost for the investor is lower. Investor welfare is higher in the due care regime than in the strict liability regime even when audit effort in the due care regime is lower than audit effort in the strict liability regime.

The Implications of Alternative Litigation Cost Allocation Systems for the Value of Audits

1997 ◽  
Vol 12 (4) ◽  
pp. 353-372 ◽  
Author(s):  
J. Efrim Boritz ◽  
Ping Zhang
Keyword(s):  
Cost Allocation ◽  
Theoretic Model ◽  
Auditor Liability ◽  
American System ◽  
Equilibrium Strategies ◽  
Game Theoretic ◽  
British System ◽  
Game Theoretic Model ◽  
Litigation Cost ◽  
Pretrial Negotiation

When an auditor's effort is not observable, auditor liability becomes an important mechanism for motivating the auditor to exert an appropriate level of audit effort. However, although the presence of legal liability helps to preserve the value of an audit to investors, some aspects of the liability system may motivate suboptimal behavior and perhaps, ultimately, detract from investors' welfare. This paper seeks to contribute to the analysis of litigation-related issues by examining the effects of alternative legal cost allocation systems—the so-called American versus British rules—on the value of audits. Using a game theoretic model, the paper characterizes investors' and an auditor's equilibrium strategies in pretrial negotiation and the auditor's effort decisions. The paper finds that the American system (where the parties pay their own litigation costs) provides a higher audit value than the British system (where the loser of a case pays the winner's litigation costs), although the auditor's total expected costs are higher in the American system than in the British system.

scholarly journals Strict Liability for Damage Caused by Self-Driving Vehicles: The Estonian Perspective

2019 ◽  
Vol 12 (2) ◽  
pp. 1-18
Author(s):  
Taivo Liivak ◽  
Janno Lahe
Keyword(s):  
Strict Liability ◽  
Tort Law ◽  
Third Parties ◽  
Member States ◽  
Liability Rules ◽  
Conventional Vehicle ◽  
Eu Member States ◽  
Fault Liability

Abstract In the case of damage caused by a conventionally driven vehicle, it is usually possible in EU Member States to subject the possessor/controller of the vehicle to heightened tortious no-fault liability, i.e. strict liability. The development and possible introduction of self-driving vehicles pose a challenge also for tort law, because it is unlikely that self-driving vehicles will not cause any damage to third parties. With the application of strict liability in mind, this article attempts to identify possible differences between damage caused by a conventional vehicle as opposed to that caused by a self-driving vehicle. In light of this developing technology the key legislative question to be answered is whether the introduction of self-driving vehicles calls for, among other things, the revision of strict liability rules. Answers to these questions are sought mainly based on Estonian tort law.

scholarly journals Liability Determination of School Sports Injury Accidents: An Analysis Framework Based on Evolutionary Game

2019 ◽  
Vol 16 (18) ◽  
pp. 3403 ◽  
Author(s):  
Qing Lan ◽  
Xiaojun Li
Keyword(s):  
Strict Liability ◽  
Evolutionary Game ◽  
Sports Injury ◽  
Liability Rules ◽  
School Sports ◽  
Accident Compensation ◽  
Research Gap ◽  
The Subject ◽  
Selection Of

In recent years, the outbreak of many school sports injury accidents aroused widespread public concern about liability determination of accident. Previous studies have examined the legal application of the liability principles from a law perspective, but few kinds of research attempted to analyze the progress of liability determination from the perspective of “law economics”. To fill this research gap, we introduce the evolutionary game model, as an important theoretical tool of “law economics”, to investigate how various factors influence the strategy selection of the parties, as well as examine what liability principle can effectively treat school sports injury accidents. The results indicate that the strategic selection of the subject of liability is significantly related to the accident compensation cost and the prevention cost of both parties. Moreover, we also find that both strict and proportional liability rules can play key roles in dealing with the issue of liability determination of school sports injury accidents, but the two liability rules have different effects on the strategic selection of parties. More specifically, compared to the strict liability principle, the proportional liability principle can motivate both the school and the students to adopt the active strategy of “appropriate caution” to prevent occurring sports injury accidents in schools.

Pre-Trial Settlement and the Value of Audits

1999 ◽  
Vol 74 (4) ◽  
pp. 473-491 ◽  
Author(s):  
Ping Zhang ◽  
Lynda Thoman
Keyword(s):  
Social Welfare ◽  
Strict Liability ◽  
The Other ◽  
Damage Awards ◽  
Liability Rules ◽  
Damage Award ◽  
Legal Costs ◽  
Net Benefits ◽  
Liability Standards ◽  
The Impact

This paper studies the impact of liability rules and damage awards on audit effort and the value of an audit (the net benefits to society of an audit) when an auditor and an investor may settle before proceeding to trial. It is demonstrated that audit effort increases with size of the damage award, but may decrease with the rigor of the auditing standards. For a given level of damage award, allowing pre-trial settlements may reduce the value of the audit despite the reduction in the deadweight legal costs. On the other hand, if the damage award is optimally chosen, then allowing settlements increases social welfare. With an appropriately set damage award, strict liability standards result in the first-best outcome, while the first-best result cannot be obtained with vague negligence rules.

Equilibria Under Negligence Liability

2021 ◽  
Vol 17 (1) ◽  
pp. 1-33
Author(s):  
Allan Feldman ◽  
Ram Singh
Keyword(s):  
Standard Model ◽  
Social Welfare ◽  
Social Welfare Function ◽  
Strict Liability ◽  
Formal Proof ◽  
Activity Level ◽  
Future Research ◽  
Liability Rules ◽  
The Social ◽  
The Standard Model

Abstract In many accident contexts, the expected accident harm depends on observable as well as unobservable dimensions of the precaution exercised by the parties involved. The observable dimensions are commonly referred to as the ‘care’ levels and the unobservable aspects as the ‘activity’ levels. In a seminal contribution, Shavell, S (1980). Strict liability versus negligence. J. Leg. Stud. 9: 1–25 extended the scope of the economic analysis of liability rules by providing a model that allows for the care as well as activity level choices. Subsequent works have used and extended Shavell’s model to predict outcomes under various liability rules, and also to compare their efficiency properties. These works make several claims about the existence and efficiency of equilibria under different liability rules, without providing any formal proof. In this paper, we re-examine the prevalent claims in the literature using the standard model itself. Contrary to these prevalent claims, we show that the standard negligence liability rules do not induce equilibrium for all of the accident contexts admissible under the model. Under the standard model, even the ‘no-fault’ rules can fail to induce a Nash equilibrium. In the absence of an equilibrium, it is not plausible to make a claim about the efficiency of a rule per-se or vis-a-vis other rules. We show that even with commonly used utility functions that meet all of the requirements of the standard model, the social welfare function may not have a maximum. In many other situations fully compatible with the standard model, a maximum of the social welfare function is not discoverable by the first order conditions. Under the standard model, even individually optimum choices might not exist. We analyze the underlying problems with the standard model and offer some insights for future research on this subject.

An Analysis of Auditor Liability Rules

1994 ◽  
Vol 32 ◽  
pp. 39 ◽  
Author(s):  
V. G. Narayanan
Keyword(s):  
Liability Rules ◽  
Auditor Liability

scholarly journals Strict civil legal liability in civil law of the Russian Federation on the example of responsibility for inflicted moral distress

2020 ◽  
pp. 48-64
Author(s):  
Artemii Shleinov
Keyword(s):  
Russian Federation ◽  
Moral Distress ◽  
Strict Liability ◽  
Civil Law ◽  
Case Law ◽  
Legal Liability ◽  
Point Of View ◽  
Legal Doctrine ◽  
Entire History ◽  
The Russian Federation

The subject of this research is the examination of such civil law institution of the Russian Federation as the “no-fault liability”. Since the question of strict liability in the current doctrine of civil law is quite critical, the author views this problem through the prism of one of the paramount means of protection of the subjective civil law, namely through the prism of responsibility for inflicted moral distress, tracing its evolution throughout the entire history and considering the legislation and case law. The novelty consists in indicating the possibility of bringing to strict civil legal liability for inflicting moral distress. The author demonstrates the presence of strict legal liability within the civil law of the Russian Federation on the example of current Russian legislation. The article provides the doctrinal and legislative examples that prove this point of view. The novelty also consists in determination of presence of the principle of “strict liability: in the Russian civil law, as well as modeling of situations that this principle could be implemented in. The research results are valuable for future development of the Russian legal doctrine and case law.

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