Advanced Search
MyIDEAS: Login to save this paper or follow this series

Strategic Judgment Proofing

Contents:

Author Info

  • Che, Yeon-Koo
  • Spier, Kathryn

Abstract

A liquidity-constrained entrepreneur needs to raise capital to finance a business activity that may cause injuries to third parties --- the tort victims. Taking the level of borrowing as fixed, the entrepreneur finances the activity with senior (secured) debt in order to shield assets from the tort victims in bankruptcy. Interestingly, senior debt serves the interests of society more broadly: it creates better incentives for the entrepreneur to take precautions than either junior debt or outside equity. Unfortunately, the entrepreneur will raise a socially excessive amount of senior debt, reducing his incentives for care and generating wasteful spending. Giving tort victims priority over senior debtholders in bankruptcy prevents over-leveraging but leads to suboptimal incentives. Lender liability exacerbates the incentive problem even further. A Limited Seniority Rule, where the firm may issue senior debt up to an exogenous limit after which any further borrowing is treated as junior to the tort claim, dominates these alternatives. Shareholder liability, mandatory liability insurance and punitive damages are also discussed.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://mpra.ub.uni-muenchen.de/6100/
File Function: original version
Download Restriction: no

Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 6100.

as in new window
Length:
Date of creation: 12 Jun 2006
Date of revision:
Handle: RePEc:pra:mprapa:6100

Contact details of provider:
Postal: Schackstr. 4, D-80539 Munich, Germany
Phone: +49-(0)89-2180-2219
Fax: +49-(0)89-2180-3900
Web page: http://mpra.ub.uni-muenchen.de
More information through EDIRC

Related research

Keywords:

Other versions of this item:

Find related papers by JEL classification:

References

References listed on IDEAS
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.:
as in new window
  1. Boyer, M. & Laffont, J.J., 1995. "Environmental Risks and Bank Liability," Cahiers de recherche, Centre interuniversitaire de recherche en économie quantitative, CIREQ 9501, Centre interuniversitaire de recherche en économie quantitative, CIREQ.
  2. Innes, Robert D., 1990. "Limited liability and incentive contracting with ex-ante action choices," Journal of Economic Theory, Elsevier, Elsevier, vol. 52(1), pages 45-67, October.
  3. Perotti, Enrico C & Spier, Kathryn E, 1993. "Capital Structure as a Bargaining Tool: The Role of Leverage in Contract Renegotiation," American Economic Review, American Economic Association, American Economic Association, vol. 83(5), pages 1131-41, December.
  4. Andrzej Skrzypacz & Peter M. DeMarzo & Ilan Kremer, 2004. "Bidding with Securities: Auctions and Security Design," Econometric Society 2004 North American Winter Meetings, Econometric Society 637, Econometric Society.
  5. Hart, Oliver & Moore, John, 1995. "Debt and Seniority: An Analysis of the Role of Hard Claims in Constraining Management," American Economic Review, American Economic Association, American Economic Association, vol. 85(3), pages 567-85, June.
  6. Shavell, S., 1986. "The judgment proof problem," International Review of Law and Economics, Elsevier, Elsevier, vol. 6(1), pages 45-58, June.
  7. Ulph, Alistair & Valentini, Laura, 2004. "Environmental liability and the capital structure of firms," Resource and Energy Economics, Elsevier, Elsevier, vol. 26(4), pages 393-410, December.
  8. 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, Oxford University Press, vol. 13(1), pages 232-58, April.
  9. HIRIART Yolande & MARTIMORT David, 2006. "The Benefits of Extended Liability," LERNA Working Papers, LERNA, University of Toulouse 06.28.221, LERNA, University of Toulouse.
  10. Dieter Balkenborg, 2001. "How Liable Should a Lender Be? The Case of Judgment-Proof Firms and Environmental Risk: Comment," American Economic Review, American Economic Association, American Economic Association, vol. 91(3), pages 731-738, June.
  11. 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, Elsevier, vol. 19(2), pages 275-293, June.
  12. Boyd, James & Ingberman, Daniel E., 1999. "Do punitive damages promote deterrence?1," International Review of Law and Economics, Elsevier, Elsevier, vol. 19(1), pages 47-68, March.
  13. Steven Shavell, 2004. "Minimum Asset Requirements and Compulsory Liability Insurance As Solutions to the Judgment-Proof Problem," NBER Working Papers 10341, National Bureau of Economic Research, Inc.
  14. Jensen, Michael C. & Meckling, William H., 1976. "Theory of the firm: Managerial behavior, agency costs and ownership structure," Journal of Financial Economics, Elsevier, Elsevier, vol. 3(4), pages 305-360, October.
  15. Boyd, James & Ingberman, Daniel E, 1994. "Noncompensatory Damages and Potential Insolvency," The Journal of Legal Studies, University of Chicago Press, University of Chicago Press, vol. 23(2), pages 895-910, June.
  16. Edward M. Iacobucci & Ralph A. Winter, 2005. "Asset Securitization and Asymmetric Information," The Journal of Legal Studies, University of Chicago Press, University of Chicago Press, vol. 34(1), pages 161-206, 01.
  17. Spier, Kathryn E. & Sykes, Alan O., 1998. "Capital structure, priority rules, and the settlement of civil claims," International Review of Law and Economics, Elsevier, Elsevier, vol. 18(2), pages 187-200, June.
  18. T. Randolph Beard, 1990. "Bankruptcy and Care Choice," RAND Journal of Economics, The RAND Corporation, vol. 21(4), pages 626-634, Winter.
  19. Craswell, Richard, 1989. "Performance, Reliance, and One-Sided Information," The Journal of Legal Studies, University of Chicago Press, University of Chicago Press, vol. 18(2), pages 365-401, June.
  20. Bruce Hay & Kathryn E. Spier, 2005. "Manufacturer Liability for Harms Caused by Consumers to Others," American Economic Review, American Economic Association, American Economic Association, vol. 95(5), pages 1700-1711, December.
  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, American Economic Association, vol. 91(3), pages 724-730, June.
  22. Lucian Arye Bebchuk & Jesse Fried, 1998. "The Uneasy Case for the Priority of Secured Claims in Bankruptcy: Further Thoughts and a Reply to Critics," NBER Working Papers 6472, National Bureau of Economic Research, Inc.
  23. Mattiacci, Giuseppe Dari & Parisi, Francesco, 2003. "The cost of delegated control: vicarious liability, secondary liability and mandatory insurance," International Review of Law and Economics, Elsevier, Elsevier, vol. 23(4), pages 453-475, December.
  24. Pitchford, Rohan, 1995. "How Liable Should a Lender Be? The Case of Judgment-Proof Firms and Environmental Risk," American Economic Review, American Economic Association, American Economic Association, vol. 85(5), pages 1171-86, December.
  25. Ringleb, Al H & Wiggins, Steven N, 1990. "Liability and Large-Scale, Long-term Hazards," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 98(3), pages 574-95, June.
  26. Kathryn E. Spier & Michael D. Whinston, 1995. "On the Efficiency of Privately Stipulated Damages for Breach of Contract: Entry Barriers, Reliance, and Renegotiation," RAND Journal of Economics, The RAND Corporation, vol. 26(2), pages 180-202, Summer.
Full references (including those not matched with items on IDEAS)

Citations

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
  1. Ichinose, Daisuke, 2011. "Contractor selection problem under extended liability," International Review of Law and Economics, Elsevier, Elsevier, vol. 31(1), pages 48-57, March.
  2. Bageri, Vasiliki & Katsoulacos, Yannis & Spagnolo, Giancarlo, 2013. "The Distortive Effects of Antitrust Fines Based on Revenue," CEPR Discussion Papers, C.E.P.R. Discussion Papers 9518, C.E.P.R. Discussion Papers.

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:pra:mprapa:6100. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Ekkehart Schlicht).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.