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Excessive spending by firms to avoid accidents: Is it a concern in practice?

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  • van 't Veld, Klaas
  • Hutchinson, Emma

Abstract

Shavell's [Shavell, S. (1986). The judgment proof problem. International Review of Law and Economics, 6, 45-58] original model of the judgment proof problem treats costs of care to prevent accidents as non-monetary. Noting that this is unrealistic when injurers are firms, several authors have found that with monetary care costs, some judgment-proof firms perversely take excess rather than insufficient care. In this paper, we make explicit the quite specific assumptions required for the excess-care result to arise even in theory, and demonstrate that, even under these assumptions, the result is likely to be quantitatively unimportant. We also suggest an alternative model that, while treating care costs as monetary, avoids the excess-care result.

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Bibliographic Info

Article provided by Elsevier in its journal International Review of Law and Economics.

Volume (Year): 29 (2009)
Issue (Month): 4 (December)
Pages: 324-335

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Handle: RePEc:eee:irlaec:v:29:y:2009:i:4:p:324-335

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Web page: http://www.elsevier.com/locate/irle

Related research

Keywords: Judgment proof problem Strict liability Industrial accidents Bankruptcy;

References

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  1. Craig, Ben & Thiel, Stuart E., 1990. "Large risks and the decision to incorporate," Journal of Economics and Business, Elsevier, vol. 42(3), pages 185-194, August.
  2. Boyer, M. & Laffont, J.J., 1995. "Environmental Risks and Bank Liability," Cahiers de recherche 9501, Universite de Montreal, Departement de sciences economiques.
  3. Eberhard Feess & Ulrich Hege, 2000. "Environmental Harm and Financial Responsibility*," The Geneva Papers on Risk and Insurance - Issues and Practice, Palgrave Macmillan, vol. 25(2), pages 220-234, April.
  4. Myers, Stewart C., 1977. "Determinants of corporate borrowing," Journal of Financial Economics, Elsevier, vol. 5(2), pages 147-175, November.
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  6. G. Dari Mattiacci & G.G.A. de Geest, 2004. "When Will Judgment Proof Injurers Take Too Much Precaution?," Working Papers 04-27, Utrecht School of Economics.
  7. Richard MacMinn, 2002. "On the Judgment Proof Problem," The Geneva Risk and Insurance Review, Palgrave Macmillan, vol. 27(2), pages 143-152, December.
  8. Schmitz, Patrick W., 2000. "On the Joint Use of Liability and Safety Regulation," MPRA Paper 12536, University Library of Munich, Germany.
  9. Shavell, S., 1986. "The judgment proof problem," International Review of Law and Economics, Elsevier, vol. 6(1), pages 45-58, June.
  10. Innes, Robert, 1999. "Optimal liability with stochastic harms, judgement-proof injurers, and asymmetric information1," International Review of Law and Economics, Elsevier, vol. 19(2), pages 181-203, June.
  11. Thomas J. Miceli & Kathleen Segerson, 2001. "A Note on Optimal Care by Wealth-Constrained Injurers," Working papers 2002-44, University of Connecticut, Department of Economics, revised May 2002.
  12. Hutchinson, Emma & van 't Veld, Klaas, 2005. "Extended liability for environmental accidents: what you see is what you get," Journal of Environmental Economics and Management, Elsevier, vol. 49(1), pages 157-173, January.
  13. Giuseppe Dari-Mattiacci & Gerrit De Geest, 2005. "Judgment Proofness under Four Different Precaution Technologies," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 161(1), pages 38-, March.
  14. Pitchford, Rohan, 1995. "How Liable Should a Lender Be? The Case of Judgment-Proof Firms and Environmental Risk," American Economic Review, American Economic Association, vol. 85(5), pages 1171-86, December.
  15. Jon Strand, 1994. "Environmental accidents under moral hazard and limited firm liability," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 4(5), pages 495-509, October.
  16. Posey, Lisa Lipowski, 1993. "Limited liability and incentives when firms can inflict damages greater than net worth," International Review of Law and Economics, Elsevier, vol. 13(3), pages 325-330, September.
  17. Jensen, Michael C. & Meckling, William H., 1976. "Theory of the firm: Managerial behavior, agency costs and ownership structure," Journal of Financial Economics, Elsevier, vol. 3(4), pages 305-360, October.
  18. Lewis, Tracy R. & Sappington, David E. M., 1999. "Using decoupling and deep pockets to mitigate judgment-proof problems1," International Review of Law and Economics, Elsevier, vol. 19(2), pages 275-293, June.
  19. van 't Veld, Klaas, 2006. "Hazardous-industry restructuring to avoid liability for accidents," International Review of Law and Economics, Elsevier, vol. 26(3), pages 297-322, September.
  20. Feess, E. & Hege, U., 2000. "Environmental harm and financial responsibility," Open Access publications from Tilburg University urn:nbn:nl:ui:12-85388, Tilburg University.
  21. Randall K. Filer & Devra L. Golbe, 2003. "Debt, Operating Margin, and Investment In Workplace Safety," Journal of Industrial Economics, Wiley Blackwell, vol. 51(3), pages 359-381, 09.
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Citations

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Cited by:
  1. van 't Veld, Klaas & Shogren, Jason F., 2012. "Environmental federalism and environmental liability," Journal of Environmental Economics and Management, Elsevier, vol. 63(1), pages 105-119.
  2. Eberl, Jakob & Jus, Darko, 2012. "The year of the cat: Taxing nuclear risk with the help of capital markets," Energy Policy, Elsevier, vol. 51(C), pages 364-373.
  3. Jakob Eberl & Darko Jus, 2012. "Evaluating policies to attain the optimal exposure to nuclear risk," RSCAS Working Papers 2012/50, European University Institute.

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