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We study an experiment where participants choose between actions which provide private benefits but may also impose losses on strangers. We compare three legal environments: no law, strict liability for the harm caused to others, and an efficiently designed negligence rule where damages are paid only when the harm exceeds the private benefit. The law may is either perfectly enforced (Severe Law) or only weakly so (Mild Law). Severe Law efficiently regulates behavior and does much better than no law. Mild Law also regulates behavior better than no law although legal sanctions are non-deterrent. Moreover, strict liability then does better
than the negligence rule in circumstances where self and group interests conflict, even though monetary incentives are the same. We investigate how legal sanctions and social preferences interact to yield this pattern.
