Optimal Liability Sharing and Court Errors : An Exploratory Analysis
AbstractWe focus in this paper on the effects of court errors on the optimal sharing of liability between firms and financiers, as an environmental policy instrument. Using a structural model of the interactions between firms, financial institutions, governments and courts we show, through numerical simulations, the distortions in liability sharing between firms and financiers that the imperfect implementation of government policies implies. We consider in particular the role played by the efficiency of the courts in avoiding Type I (finding an innocent firm guilty of inappropriate care) and Type II (finding a guilty firm innocent of inappropriate care) errors. This role is considered in a context where liability sharing is already distorted (when compared with first best values) due not only to the courts’ own imperfect assessment of safety care levels exerted by firm but also to the presence of moral hazard and adverse selection in financial contracting, as well as of noncongruence of objectives between firms and financiers on the one hand and social welfare maximization on the other. Our results indicate that an increase in the efficiency of the court system in avoiding errors raises safety care levels, thereby reducing the probability of accident, and allowing the social welfare maximizing government to impose a lower liability [higher] share for firms [financiers] as well as a lower standard level of care.
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Bibliographic InfoPaper provided by Centre interuniversitaire de recherche en économie quantitative, CIREQ in its series Cahiers de recherche with number 05-2010.
Length: 27 pages
Date of creation: 2010
Date of revision:
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Environmental Policy; Court Efficiency; Liability Sharing; Regulation; Incomplete Information;
Other versions of this item:
- Marcel Boyer & Donatella Porrini, 2010. "Optimal liability sharing and court errors: an exploratory analysis," Working Papers hal-00463913, HAL.
- Marcel Boyer & Donatella Porrini, 2010. "Optimal Liability Sharing and Court Errors: An Exploratory Analysis," CESifo Working Paper Series 3073, CESifo Group Munich.
- D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
- G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
- K13 - Law and Economics - - Basic Areas of Law - - - Tort Law and Product Liability
- K32 - Law and Economics - - Other Substantive Areas of Law - - - Environmental, Health, and Safety Law
- Q28 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation - - - Government Policy
This paper has been announced in the following NEP Reports:
- NEP-ALL-2010-04-17 (All new papers)
- NEP-CTA-2010-04-17 (Contract Theory & Applications)
- NEP-REG-2010-04-17 (Regulation)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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