Minimum Asset and Liability Insurance Requirements on Judgment-Proof Individuals When Harm Is Endogenous

Abstract

Shavell (2005) studied the optimality of minimum asset requirements within a framework in which individuals can influence the probability of an accident. We reinvestigate Shavellʼs model for the opposite accident scenario, in which individuals can influence the magnitude of harm, and find different policy implications. In particular, we show that it could be optimal to completely ban judgment-proof individuals from participating in a potentially harmful activity. We also examine the effect of liability insurance, and find that regulatory authorities should tighten standards relative to the pure asset requirement and that liability insurance increases social welfare.