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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
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    File URL: http://purl.umn.edu/8531
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    References listed on IDEAS

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    1. Polinsky, A Mitchell, 1980. "Strict Liability vs. Negligence in a Market Setting," American Economic Review, American Economic Association, vol. 70(2), pages 363-367, May.
    2. Hamilton, Stephen F., 1999. "Demand shifts and market structure in free-entry oligopoly equilibria," International Journal of Industrial Organization, Elsevier, vol. 17(2), pages 259-275, February.
    3. S. Baranzoni & P. Bianchi & L. Lambertini, 2000. "Multiproduct Firms, Product Differentiation, and Market Structure," Working Papers 368, Dipartimento Scienze Economiche, Universita' di Bologna.
    4. Boyer, Marcel & Laffont, Jean-Jacques, 1997. "Environmental risks and bank liability," European Economic Review, Elsevier, vol. 41(8), pages 1427-1459, August.
    5. Eberhard Feess & Ulrich Hege, 2000. "Environmental Harm and Financial Responsibility*," The Geneva Papers on Risk and Insurance - Issues and Practice, Palgrave Macmillan;The Geneva Association, vol. 25(2), pages 220-234, April.
    6. Hamilton, Stephen F. & Sunding, David L., 2000. "Product liability, entry incentives and market structure," International Review of Law and Economics, Elsevier, vol. 20(2), pages 269-283, June.
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    Keywords

    Marketing;

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