Professional Liability Under Asymmetric Information and the Market for Experts

Abstract In this paper, we consider a market for experts. We argue that the strict liability rule is socially better than the negligence rule, because the expert who knows his own expertise level can internalize the externality due to an accident exactly under the strict liability rule, whereas the legal authority who does not know the individual expert’s expertise level cannot set the accurate due care level of the expert under the negligence rule. We also show that whether the due care of a more capable expert should be higher or lower depends on how the expertise helps the expert. If higher expertise of the expert can reduce the cost of taking care to avoid an accident, (i.e., expertise and effort are complementary), it is socially optimal that a more able expert takes more care to avoid an accident, but if higher expertise decreases the probability of an accident causing damages to the client, (i.e., expertise and effort are substitutable), paradoxically, it is socially optimal that a more able expert takes less care. In the case of market tort in which two experts compete in the market, we show that the invariance results established in the literature do not hold, when the accident probability is private information of experts.