Optimal Liability With Stochastic Harms, Judgement-Proof Injurers, and Asymmetric Information ROBERT INNES University of Arizona, Tucson, Arizona, USA E-mail: innes@ag.arizona.edu This paper studies the use of ex post liability to regulate unilateral accidents when injurers have (1) different probability distributions for accident damages and, as a result, different optimal levels of accident prevention effort, (2) private information about their damage distributions, and (3) liability that is limited to the injurer’s available assets. When the asset bound on liability is in a plausible range, an optimal damage-contingent legal rule is shown to take a threshold form, assessing maximal liability when ex post damages are above a given threshold and zero liability otherwise. © 1999 by Elsevier Science Inc. I. Introduction In many cases, parties who potentially cause injuries have better information than others about the risks and consequences of accidents that they may cause. Often, they also have financial resources that are insufficient to cover victims’ damages from particularly harmful accidents. Examples include medical product failures (e.g., , Tha- lidamide and the Dalcon Shield), industrial disasters (e.g., chemical releases such as the one that occurred at the Union Carbide plant in Bhopal, India), and hazardous substance releases of the sort covered by the U.S. Comprehensive Environmental Response, Compensation and Liability Act (CERCLA) (e.g., leakages from under- ground petroleum storage tanks or mine tailing ponds). In practice, such problems are regulated by both ex ante safety standards [e.g., citing and technology standards for the production and disposal of toxic wastes, as specified in the U.S. Resource Conservation and Recovery Act (1982)] and ex-post liability [e.g., as assessed under tort law and CERCLA (1980, 1986, 1990)]. I want to thank an anonymous reviewer and Rohan Pitchford for inspired comments on this paper. I am also indebted to Dennis Cory, Edna Loehman, John Antle, and seminar participants at Brigham Young University, the University of Arizona, and American Association of Agricultural Economics meetings in San Diego for valuable encouragement and comments on earlier versions. The usual disclaimer applies. International Review of Law and Economics 19:181–203, 1999 © 1999 by Elsevier Science Inc. 0144-8188/99/$–see front matter 655 Avenue of the Americas, New York, NY 10010 PII S0144-8188(99)00004-6