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Modeling the Choice Between Regulation and Liability in Terms of Social Welfare

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  • Marcel Boyer

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  • Donatella Porrini

Abstract

Using a formal political economy model with incomplete information regarding the accident preventing activities chosen by the firm (moral hazard) under limited liability, we illustrate different conditions under which an environmental protection system based on extending liability to private financiers or to insurers through compulsory full insurance of the firm is welfare superior, inferior or equivalent to a system based on an incentive regulatory scheme subject to capture by the regulatees. We consider explicitly the following factors: the differential cost between low and high levels of environmental protection activities and the associated accident probabilities, the social cost of public funds, the informational rent of the firm, the net profitability of the risky activities, the level of damages if an accident occurs, the bias factor in case of regulatory capture. We characterize in this parameter space the regions where one system dominates the other. À l aide d un modèle formel d économie politique avec information incomplète concernant les activités de prévention d accident choisies par l entreprise (risque moral) à responsabilité limitée, nous illustrons différentes conditions sous lesquelles un système de protection environnementale reposant sur la responsabilité élargie aux financiers privés et aux assureurs grâce à une assurance complète et obligatoire de la firme est supérieur, inférieur ou équivalent en terme de bien-être social à un système reposant sur un mécanisme de réglementation incitative sujet à la capture par les réglementés. Nous considérons explicitement les facteurs suivants : le coût différentiel entre les niveaux faibles et élevés d activités de protection de l'environnement et les probabilités d'accidents qui leur sont associées, le coût social des fonds publics, la rente informationnelle de l entreprise, la rentabilité nette des activités risquées, le niveau des dommages en cas d accident et le facteur de biais en cas de capture de l agence de réglementation. Nous caractérisons, dans cet espace de paramètres, les régions dans lesquelles un système domine l'autre.

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Bibliographic Info

Paper provided by CIRANO in its series CIRANO Working Papers with number 2002s-13.

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Date of creation: 01 Feb 2002
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Handle: RePEc:cir:cirwor:2002s-13

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Keywords: Environment; extended liability; CERCLA; capture; choice of instruments; Environnement; responsabilité élargie; CERCLA; capture; choix d'instruments;

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  1. Boyer, Marcel & Laffont, Jean-Jacques, 1994. "Environmental Risks and Bank Liability," IDEI Working Papers 45, Institut d'Économie Industrielle (IDEI), Toulouse.
  2. Marcel Boyer & Tracy R. Lewis & Wei Lin Liu, 2000. "Setting standards for credible compliance and law enforcement," Canadian Journal of Economics, Canadian Economics Association, vol. 33(2), pages 319-340, May.
  3. Stiglitz, Joseph E & Dasgupta, P, 1971. "Differential Taxation, Public Goods and Economic Efficiency," Review of Economic Studies, Wiley Blackwell, vol. 38(114), pages 151-74, April.
  4. Schmitz, Patrick W., 2000. "On the Joint Use of Liability and Safety Regulation," MPRA Paper 12536, University Library of Munich, Germany.
  5. Tiller, Emerson H & Spiller, Pablo T, 1999. "Strategic Instruments: Legal Structure and Political Games in Administrative Law," Journal of Law, Economics and Organization, Oxford University Press, vol. 15(2), pages 349-77, July.
  6. Hahn, Robert W, 1990. " The Political Economy of Environmental Regulation: Towards a Unifying Framework," Public Choice, Springer, vol. 65(1), pages 21-47, April.
  7. Steven Shavell, 1983. "Liability for Harm Versus Regulation of Safety," NBER Working Papers 1218, National Bureau of Economic Research, Inc.
  8. Marcel Boyer & Donatella Porrini, 2000. "Law versus Regulation: A Political Economy Model of Instrument Choice in Environmental Policy," CIRANO Working Papers 2000s-57, CIRANO.
  9. Pfaff, Alexander S P & Sanchirico, Chris William, 2000. "Environmental Self-Auditing: Setting the Proper Incentives for Discovery and Correction of Environmental Harm," Journal of Law, Economics and Organization, Oxford University Press, vol. 16(1), pages 189-208, April.
  10. 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.
  11. Marcel Boyer & Jean-Jacques Laffont, 1999. "Toward a Political Theory of the Emergence of Environmental Incentive Regulation," RAND Journal of Economics, The RAND Corporation, vol. 30(1), pages 137-157, Spring.
  12. Robert W. Hahn, 1993. "Comparing Environmental Markets with Standards," Canadian Journal of Economics, Canadian Economics Association, vol. 26(2), pages 346-54, May.
  13. Yolande Hiriart & David Martimort, 2006. "The benefits of extended liability," RAND Journal of Economics, RAND Corporation, vol. 37(3), pages 562-582, 09.
  14. Shavell, S., 1986. "The judgment proof problem," International Review of Law and Economics, Elsevier, vol. 6(1), pages 45-58, June.
  15. BOYER, Marcel, 1995. "Environmental Protection Producer Insolvency and Lender Liability," Cahiers de recherche 9557, Universite de Montreal, Departement de sciences economiques.
  16. Kolstad, Charles D & Ulen, Thomas S & Johnson, Gary V, 1990. "Ex Post Liability for Harm vs. Ex Ante Safety Regulation: Substitutes or Complements?," American Economic Review, American Economic Association, vol. 80(4), pages 888-901, September.
  17. 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.
  18. Boyd, James & Ingberman, Daniel E, 1997. "The Search for Deep Pockets: Is "Extended Liability" Expensive Liability?," Journal of Law, Economics and Organization, Oxford University Press, vol. 13(1), pages 232-58, April.
  19. Heyes, Anthony G, 1996. "Lender Penalty for Environmental Damage and the Equilibrium Cost of Capital," Economica, London School of Economics and Political Science, vol. 63(250), pages 311-23, May.
  20. Peter S. Menell, 1991. "The Limitations of Legal Institutions for Addressing Environmental Risks," Journal of Economic Perspectives, American Economic Association, vol. 5(3), pages 93-113, Summer.
  21. Tracy R. Lewis & David E. M. Sappington, 2001. "How Liable Should a Lender Be? The Case of Judgment-Proof Firms and Environmental Risk: Comment," American Economic Review, American Economic Association, vol. 91(3), pages 724-730, June.
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