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Prevention, Limited Liability and Market Structure

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  • Coestier, B.
  • Gozlan, Estelle
  • Marette, Stephan

Abstract

Under a market setting, we analyse the impact of legal liability on prevention, taking into account the possible limited wealth of firms. We show that under strict liability, firms my choose ex ante not to be able to fully indemnify victims ex post: whatever the market structure, they may use limited liability strategically by investing in prevention in excess of what is socially optimal. The negligence rule prevents firms from over-investment. For high levels of damages, under both liability rules, firms exert an insufficient effort of prevention. A welfare analysis established that when the judgment proof problem is acute, the optimal public intervention ranges from banning the production to imposing the negligence rule.

Suggested Citation

  • Coestier, B. & Gozlan, Estelle & Marette, Stephan, 2002. "Prevention, Limited Liability and Market Structure," 2002 International Congress, August 28-31, 2002, Zaragoza, Spain 8531, European Association of Agricultural Economists.
    • Handle: RePEc:ags:eaae02:8531
    DOI: 10.22004/ag.econ.8531
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    References listed on IDEAS

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