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Comparisons of the Incentive for Insolvency under Different Legal Regimes

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  • Elizabeth Klee
  • Lewis Kornhauser

Abstract

This paper compares the effects of joint and several liability on capital and production decisions with the effects of several-only liability in the context of hazardous-waste generation. Our main result shows that increased potential liability causes firms to decrease asset exposure but may also lead firms to create less waste. First, we find that both several-only and joint and several liability induce firms to go bankrupt more often and create more waste than is socially optimal. Then we find that, for a given level of funds, joint and several liability induces firms to go bankrupt more often and to create more waste than does several-only liability. This implies that society will be responsible for a larger share of cleanup under joint and several liability than under several-only liability. Finally, we show that firms with potentially higher liabilities for cleanup will raise fewer funds, creating “smaller” firms and thus the possibility of less waste generated overall.

Suggested Citation

  • Elizabeth Klee & Lewis Kornhauser, 2007. "Comparisons of the Incentive for Insolvency under Different Legal Regimes," The Journal of Legal Studies, University of Chicago Press, vol. 36(1), pages 141-170, January.
    • Handle: RePEc:ucp:jlstud:v:36:y:2007:p:141-170
    DOI: 10.1086/509273
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    References listed on IDEAS

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    1. T. Randolph Beard, 1990. "Bankruptcy and Care Choice," RAND Journal of Economics, The RAND Corporation, vol. 21(4), pages 626-634, Winter.
    2. Watts, Alison, 1998. "Insolvency and Division of Cleanup Costs," International Review of Law and Economics, Elsevier, vol. 18(1), pages 61-76, March.
    3. Ringleb, Al H & Wiggins, Steven N, 1990. "Liability and Large-Scale, Long-term Hazards," Journal of Political Economy, University of Chicago Press, vol. 98(3), pages 574-595, June.
    4. Boyd, James & Ingberman, Daniel E, 1997. "The Search for Deep Pockets: Is "Extended Liability" Expensive Liability?," The Journal of Law, Economics, and Organization, Oxford University Press, vol. 13(1), pages 232-258, April.
    5. Andrew F. Daughety & Jennifer F. Reinganum, 2006. "Markets, torts, and social inefficiency," RAND Journal of Economics, RAND Corporation, vol. 37(2), pages 300-323, June.
    6. Kornhauser, Lewis A. & Revesz, Richard L., 1989. "Apportioning Damages Among Potentially Insolvent Actors," Working Papers 89-22, C.V. Starr Center for Applied Economics, New York University.
    7. Hansen, Robert G. & Thomas, Randall S., 1999. "The efficiency of sharing liability for hazardous waste: effects of uncertainty over damages," International Review of Law and Economics, Elsevier, vol. 19(1), pages 135-157, March.
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