Essays on applied economics



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Proposition 2.1. If taking high care is socially efficient, then under both CN and NCN, taking high care is a Nash equilibrium.

Proof: Given the assumption about the parameter values, it is easy to check from the payoff matrix that taking high care is a Nash equilibrium.


As we can see from the payoff matrix, the only difference between CN and NCN is the value of . When there is an accident between a party taking low care and a party taking medium care, the party who takes low care has to incur a larger fraction of the cost of the accident under CN than under NCN. This provides a greater incentive to abandon low care under CN, as we will discuss in the next section.


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