Sharing sequentially triggered losses
Jens Gudmundsson, Jens Leth Hougaard, Chiu Yu Ko · RePEc: Research Papers in Economics · 2020
We examine a chain of sequential losses: an agent causes a loss to another, which triggers a loss to a third, and so forth. Our objective is to redistribute the losses fairly, taking into account that the chain turns "victim" to "injurer" in its subsequent step. This opens up for many interpretations of the notion of strict liability from the literature on law and economics: should agents merely be responsible for the direct loss they cause or also bear some of the indirect losses they trigger? Through an axiomatic approach, we characterize the parametric class of fixed-fraction rules. These hold each agent accountable for a fixed fraction of the direct harm she causes while the initiator-the root cause of the loss chain-is liable for the residual. We then explore the case in which individual losses are contested while agreement remains on the total loss and the order of liability. We extend the principle of equalizing losses to equalizing distances to ideal allocations. In particular, we find that losses always can be distributed equidistant to every agent's ideal allocation. Interestingly, this fair allocation coincides with the intermediate fixed-fraction rule when individual losses are identical.