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Environmental Harm and Financial Responsibility*

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  • Eberhard Feess

    (Department of Economics, University of Frankfurt, D-60325 Frankfurt, Germany. E-mail feess@wiwi.uni-frankfurt.de)

  • Ulrich Hege

    (Tilburg University, Center for Economic Research and Department of Finance, NL-5000 Tilburg, The Netherlands. E-mail hege@kub.nl)

Abstract

Firms will exert too little care due to a limited liability effect if damages are likely to exceed their equity. This is particularly important for environmental and product liability and motivates the current discussion about mandatory insurance and extending liability to creditors. We model the choice of the care level as a moral hazard problem that can be solved through costly monitoring. Conventional strict liability and lender liability both lead to distortions in the capital structure and to inefficiently low care. By contrast, mandatory liability coverage (financial responsibility) that can be satisfied by either an insurance contract or a lender guarantee leads to the first best allocation if managers can self-insure, and to the second best if managers cannot self-insure but choose to be monitored. The Geneva Papers on Risk and Insurance (2000) 25, 220–234. doi:10.1111/1468-0440.00061

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Bibliographic Info

Article provided by Palgrave Macmillan in its journal The Geneva Papers on Risk and Insurance.

Volume (Year): 25 (2000)
Issue (Month): 2 (April)
Pages: 220-234

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Handle: RePEc:pal:gpprii:v:25:y:2000:i:2:p:220-234

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Citations

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Cited by:
  1. Marcel Boyer & Donatella Porrini, 2008. "The Efficient Liability Sharing Factor For Environmental Disasters: Lessons For Optimal Insurance Regulation," CIRANO Working Papers, CIRANO 2008s-03, CIRANO.
  2. Marcel Boyer & Donatella Porrini, 2010. "Optimal Liability Sharing and Court Errors: An Exploratory Analysis," CESifo Working Paper Series 3073, CESifo Group Munich.
  3. Feess, Eberhard & Hege, Ulrich, 2003. "Safety monitoring, capital structure, and "financial responsibility"," International Review of Law and Economics, Elsevier, Elsevier, vol. 23(3), pages 323-339, September.
  4. Coestier, B. & Gozlan, Estelle & Marette, Stephan, 2002. "Prevention, Limited Liability and Market Structure," 2002 International Congress, August 28-31, 2002, Zaragoza, Spain, European Association of Agricultural Economists 8531, European Association of Agricultural Economists.
  5. Bidénam Kambia-Chopin, 2010. "Environmental risks, the judgment-proof problem and financial responsibility," European Journal of Law and Economics, Springer, Springer, vol. 30(2), pages 77-87, October.
  6. van 't Veld, Klaas & Hutchinson, Emma, 2009. "Excessive spending by firms to avoid accidents: Is it a concern in practice?," International Review of Law and Economics, Elsevier, Elsevier, vol. 29(4), pages 324-335, December.
  7. Marcel Boyer & Donatella Porrini, 2007. "Sharing Liability Between Banks and Firms: The Case of Industrial Safety Risk," CIRANO Working Papers, CIRANO 2007s-04, CIRANO.
  8. Kvakkestad, Valborg & Vatn, Arild, 2011. "Governing uncertain and unknown effects of genetically modified crops," Ecological Economics, Elsevier, Elsevier, vol. 70(3), pages 524-532, January.
  9. 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.
  10. Henry van Egteren & R. Smith & Dean McAfee, 2004. "Harmonization of Environmental Regulations When Firms are Judgment Proof," European Journal of Law and Economics, Springer, Springer, vol. 17(2), pages 139-164, March.
  11. Alfred Endres & Tim Friehe, 2012. "Generalized Progress of Abatement Technology: Incentives Under Environmental Liability Law," Environmental & Resource Economics, European Association of Environmental and Resource Economists, European Association of Environmental and Resource Economists, vol. 53(1), pages 61-71, September.

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