On extended liability in a model of adverse selection
AbstractWe consider a model where a judgment-proof firm needs finance to realize a project. This project might cause an environmental hazard with a probability that is the private knowledge of the firm. Thus there is asymmetric information with respect to the environmental riskiness of the project. We consider the implications of a simple joint and strict liability rule on the lender and the firm where, in case of a damage, the lender is responsible for that part of the liability which the judgment-proof firm cannot pay. We use a weighted version of the neutral bargaining solution (Myerson 1983 / 1984) to determine the financial contract between the lender and the firm. In the given model we show that either full or a punitive liability is optimal.
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Bibliographic InfoPaper provided by Exeter University, Department of Economics in its series Discussion Papers with number 0404.
Date of creation: Nov 2004
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judgement proofness; extended liability; neutral bargaining solution.;
Find related papers by JEL classification:
- K13 - Law and Economics - - Basic Areas of Law - - - Tort Law and Product Liability; Forensic Economics
- K32 - Law and Economics - - Other Substantive Areas of Law - - - Environmental, Health, and Safety Law
- Q38 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Nonrenewable Resources and Conservation - - - Government Policy (includes OPEC Policy)
- G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
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- Marcel Boyer & Donatella Porrini, 2007. "Sharing Liability Between Banks and Firms: The Case of Industrial Safety Risk," CIRANO Working Papers 2007s-04, CIRANO.
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