VICARIOUS LIABILITY UNDER A NEGLIGENCE RULE

The previous literature has shown that if the agent has limited assets, the vicarious liability law under a strict liability rule can effectively make the principal monitor her agent, and induce the agent to take more care, which thereby reduces the social cost. In practice the negligence rule still applies to many tort cases, and the principal's monitoring evidence is often needed to prove the agent's negligence. It is possible that the principal will conceal the monitoring evidence from the court in order to avoid the vicarious liability. In such a case the society has to incur higher investigation cost than otherwise. To save the investigation cost, the court may want to provide incentives to induce honest reports either by lowering the due care level, or by lowering the level of vicarious liability.