The Benefits of Extended Liability
AbstractWe characterize the optimal regulation of a firm that undertakes an environmentally risky activity. This firm (the agent) is protected by limited liability and bound by contract to a stakeholder (the principal). The level of safety care exerted by the agent is nonobservable. This level of care depends both on the degree of incompleteness of the regulatory contract 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 otherwise strictly improve welfare. An incomplete regulation supplemented by an ex post extended liability regime can sometime achieve the second best. Ordering information: This article can be ordered from http://gemini.econ.umd.edu/cgi-bin/rje_online.cgi?action=buy&year=2006&issue=aut&page=562&tid=30492&sc=1869P1N9 .
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Bibliographic InfoArticle provided by The RAND Corporation in its journal RAND Journal of Economics.
Volume (Year): 37 (2006)
Issue (Month): 3 (Autumn)
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Other versions of this item:
- Hiriart, Yolande & Martimort, David, 2004. "The Benefits of Extended Liability," IDEI Working Papers 334, Institut d'Économie Industrielle (IDEI), Toulouse, revised Jun 2005.
- Hiriart, Yolande & Martimort, David, 2006. "The Benefits of Extended Liability ," Open Access publications from University of Toulouse 1 Capitole http://neeo.univ-tlse1.fr, University of Toulouse 1 Capitole.
- HIRIART Yolande & MARTIMORT David, 2006. "The Benefits of Extended Liability," LERNA Working Papers 06.28.221, LERNA, University of Toulouse.
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