The benefits of extended liability

Abstract

Abstract:We characterize the optimal regulation of a firm which undertakes an environmentally risky activity. This firm (the agent) is protected by limited liability and bound by contract to a stakeholder (the principal). A key feature is the non-observability of the level of safety care exerted by the agent. This level of care depends both on the degree of incompleteness of the regulatory contract (i.e., whether private transactions can be controlled or not) and on the allocation of bargaining power between the principal and the agent. Increasing the wealth of the principal that can be seized upon an accident has no value when private transactions are regulated but might strictly improve welfare otherwise. We derive bounds on the principal's wealth so that the second-best complete regulatory outcome can still be achieved with an incomplete regulation if it is supplemented by an ex post extended liability regime. Extensions to the cases of multiple principals and of a ban on regulatory rewards are also analyzed. * Financial support by the French Ministry of Ecology and Sustainable Development is acknowledged. We are indebted to the editor Joseph Harrington and to two referees for useful comments which have much improved the presentation of the paper. We also thank for comments Denis Gromb and audiences at various seminars and conferences.

Strategic Judgment Proofing

“…18 If the high effort cannot be supported, then the junior debtholders would demand an interest rate above 11%, further diluting the entrepreneur's incentives.…”

La responsabilité environnementale des prêteurs : difficultés juridiques et ensemble des possibles

“…De par ses forte références à CERCLA, l'analyse économique contemporaine d'auteurs tels que Hiriart et Martimort (2006), Dionne et Spaeter (2003), Boyer et Porrini (2006 7 par exemple, continue d'être influencée par les travaux réalisées ante les amendements de 1996 par Boyer et Laffont (1995), Boyer et Laffont (1997), Pitchford(1995) 8 . Il en découle le hiatus évoqué entre la pratique juridique qui repousse, voire institutionnalise, l'irresponsabilité des prêteurs et la théorie économique qui, au contraire, considère acquise cette responsabilité.…”

Assessing contaminated land cleanup costs and strategies

“…Since insolvency and limited liability often make it impossible to apply the polluter-pays principle, for instance, it has been found that assigning some responsibility to lenders and other deep-pocket parties up or down the value chain might contribute to set incentives right (see Alberini et al 2005, andHiriart andMartimort 2006, among others). Since the benefits of remediation can be unclear, several works have developed rigorous benefit-assessment techniques (see Swartjes 2011, Haninger et al 2014, and the references therein).…”