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Strict Liability, Capped Strict Liability, and Care Effort under Asymmetric Information

  • Gérard Mondello

This paper compares the effectiveness of regimes of strict liability and capped strict liability in an agency relationship among a regulatory agency and operators of risky activities. Under an assumption of double asymmetric information (wealth and efficiency in care effort), it shows that capping liability is more efficient than keeping with strict liability, this at the price of an informational rent. Efficiency means that the efficient agent supplies the level of safety effort equivalent to that in the first-best solution. At the optimum, the rent is minimized by the efficient contract supplied by the principal.

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Article provided by Mohr Siebeck, Tübingen in its journal Journal of Institutional and Theoretical Economics.

Volume (Year): 168 (2012)
Issue (Month): 2 (June)
Pages: 232-251

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Handle: RePEc:mhr:jinste:urn:sici:0932-4569(201206)168:2_232:slcsla_2.0.tx_2-9
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  1. Boyer, Marcel & Laffont, Jean-Jacques, 1997. "Environmental risks and bank liability," European Economic Review, Elsevier, vol. 41(8), pages 1427-1459, August.
  2. Miceli, Thomas J. & Segerson, Kathleen, 2003. "A note on optimal care by wealth-constrained injurers," International Review of Law and Economics, Elsevier, vol. 23(3), pages 273-284, September.
  3. Marcel Boyer & Donatella Porrini, 2007. "Sharing Liability Between Banks and Firms: The Case of Industrial Safety Risk," CIRANO Working Papers 2007s-04, CIRANO.
  4. HIRIART Yolande & MARTIMORT David, 2006. "The Benefits of Extended Liability," LERNA Working Papers 06.28.221, LERNA, University of Toulouse.
  5. Schmitz, Patrick W., 2000. "On the Joint Use of Liability and Safety Regulation," MPRA Paper 12536, University Library of Munich, Germany.
  6. repec:ebl:ecbull:v:11:y:2006:i:1:p:1-7 is not listed on IDEAS
  7. G. Dari Mattiacci & G.G.A. de Geest, 2004. "When Will Judgment Proof Injurers Take Too Much Precaution?," Working Papers 04-27, Utrecht School of Economics.
  8. Marcel Boyer & Jean-Jacques Laffont, 1995. "Environmental Protection, Producer Insolvency and Lender Liability," CIRANO Working Papers 95s-50, CIRANO.
  9. 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, vol. 91(3), pages 731-738, June.
  10. 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.
  11. Faure, Michael & Wang, Hui, 2008. "Financial caps for oil pollution damage: A historical mistake?," Marine Policy, Elsevier, vol. 32(4), pages 592-606, July.
  12. T. Randolph Beard, 1990. "Bankruptcy and Care Choice," RAND Journal of Economics, The RAND Corporation, vol. 21(4), pages 626-634, Winter.
  13. Hiriart, Yolande & Martimort, David, 2004. "Environmental Risk Regulation and Liability under Adverse Selection and Moral Hazard," IDEI Working Papers 256, Institut d'Économie Industrielle (IDEI), Toulouse.
  14. Tsuyoshi Toshimitsu & Naoto Jinji, 2007. "Quality Differentiation, Welfare, And The Mode Of Competition In A Vertically Differentiated Product Market: A Note," The Japanese Economic Review, Japanese Economic Association, vol. 58(3), pages 407-416.
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