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Bargaining power and the impact of lender liability for environmental damages

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  • Balkenborg, D.

Abstract

Should lenders be made liable for environmental damages caused by their customers? In a recent paper Pitchford studied the case where the customer is a wealth-constrained manager-owned firm. He argued convincingly that a joint liability of lender and firm may reduce the firm's incentive to prevent an environmental damage and may therefore be socially harmful. However, his argument hinges on the assumption that the lender has no bargaining power and makes 0-profits in a contract. In this paper we study all possible optimal contracts between the borrower and the lender. In particular we study the case where the lender has all the bargaining power. We use the weighted Nash-bargaining solution to handle both cases in a unified framework. The results for the case where the lender has a high bargaining power differ substantially from Pitchford's findings. Then a joint liability rule is socially preferable to single liability of the firm. In fact, often it is optimal to require a liability above the actual costs of a damage or to set it so high that it extracts all potential profits from the project

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Bibliographic Info

Paper provided by Economics Division, School of Social Sciences, University of Southampton in its series Discussion Paper Series In Economics And Econometrics with number 9709.

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Date of creation: 01 Jan 1997
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Handle: RePEc:stn:sotoec:9709

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Cited by:
  1. Feess, Eberhard & Hege, Ulrich, 2003. "Safety monitoring, capital structure, and "financial responsibility"," International Review of Law and Economics, Elsevier, Elsevier, vol. 23(3), pages 323-339, September.
  2. Eberhard Feess, 1999. "Lender Liability for Environmental Harm: An Argument Against Negligence Based Rules," European Journal of Law and Economics, Springer, Springer, vol. 8(3), pages 231-250, November.

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