NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Optimal Liability for Terrorism

Darius Lakdawalla, Eric Talley

NBER Working Paper No. 12578
Issued in October 2006
NBER Program(s):   LE

This paper analyzes the normative role for civil liability in aligning terrorism precaution incentives, when the perpetrators of terrorism are unreachable by courts or regulators. We consider the strategic interaction among targets, subsidiary victims, and terrorists within a sequential, game-theoretic model. The model reveals that, while an "optimal" liability regime indeed exists, its features appear at odds with conventional legal templates. For example, it frequently prescribes damages payments from seemingly unlikely defendants, directing them to seemingly unlikely plaintiffs. The challenge of introducing such a regime using existing tort law doctrines, therefore, is likely to be prohibitive. Instead, we argue, efficient precaution incentives may be best provided by alternative policy mechanisms, such as a mutual public insurance pool for potential targets of terrorism, coupled with direct compensation to victims of terrorist attacks.

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