Ambiguity and Accident Law

Environmental accidents often involve ambiguous risks, i.e. the relevant probabilities are unknown. This paper studies how liability rules are a¤ected by ambiguity. The injurer and the victim choose a level of care, which is observable, and an unobservable action. Both actions may a¤ect the size and/or likelihood of loss. We analyse the welfare implications of tort rules. First, we show that with ambiguity, negligence is likely to perform better than strict liability. Second, we propose a tort rule of negligence and punitive damages, which gives the e¢ cient levels of both care and unobserved actions