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Risky Activities and Strict Liability Rules: Delegating Safety

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  • Gérard Mondello

    (University of Nice Sophia Antipolis, CREDECO, GREDEG, UMR 6727, CNRS)

Abstract

This paper studies the delegation of activities that pose serious risks to health and the environment in an economy regulated by strict liability schemes. Strict liability induces judgment-proof possibilities. Two civil liability regimes are then compared: a strict liability scheme and a capped strict liability one. The argument is led under a twofold asymmetric information assumption between the principal and the agent: the efficiency level in effort for safety and the agent’s level of wealth. The paper shows that standard strict liability under information asymmetries deters the efficient agent to compete and favors adverse selection. Then, under conditions, a capped strict liability regime is a better regime than a standard strict liability one because it induces the efficient agent to supply the level of safety effort equivalent to the first best solution. The counterpart is the perception of an informational rent by the efficient agent. At the optimum, this rent is minimized by the efficient contract supplied by the principal.

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Bibliographic Info

Paper provided by Fondazione Eni Enrico Mattei in its series Working Papers with number 2010.103.

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Date of creation: Sep 2010
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Handle: RePEc:fem:femwpa:2010.103

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Keywords: Environment; Strict Liability; Ex-Ante Regulation; Ex-Post Liability; Judgment-Proof; Environment Law; CERCLA; Environmental Liability;

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  1. repec:ebl:ecbull:v:11:y:2006:i:1:p:1-7 is not listed on IDEAS
  2. BOYER, Marcel, 1995. "Environmental Protection Producer Insolvency and Lender Liability," Cahiers de recherche 9557, Universite de Montreal, Departement de sciences economiques.
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  4. 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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  7. Giuseppe Dari-Mattiacci, 2006. "Limiting Limited Liability," Economics Bulletin, AccessEcon, vol. 11(1), pages 1-7.
  8. Faure, Michael & Wang, Hui, 2008. "Financial caps for oil pollution damage: A historical mistake?," Marine Policy, Elsevier, vol. 32(4), pages 592-606, July.
  9. Thomas J. Miceli & Kathleen Segerson, 2001. "A Note on Optimal Care by Wealth-Constrained Injurers," Working papers 2002-44, University of Connecticut, Department of Economics, revised May 2002.
  10. Shavell, S., 1986. "The judgment proof problem," International Review of Law and Economics, Elsevier, vol. 6(1), pages 45-58, June.
  11. Segerson, Kathleen & Tietenberg, Tom, 1992. "The structure of penalties in environmental enforcement: An economic analysis," Journal of Environmental Economics and Management, Elsevier, vol. 23(2), pages 179-200, September.
  12. Baron, David P & Myerson, Roger B, 1982. "Regulating a Monopolist with Unknown Costs," Econometrica, Econometric Society, vol. 50(4), pages 911-30, July.
  13. Schmitz, Patrick W., 2000. "On the joint use of liability and safety regulation," International Review of Law and Economics, Elsevier, vol. 20(3), pages 371-382, September.
  14. 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.
  15. 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.
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