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Sharing Liability Between Banks and Firms: The Case of Industrial Safety Risk

  • Marcel Boyer
  • Donatella Porrini

We characterize the distortions in environmental liability sharing between firms and banks that the imperfect implementation of government policies implies. These distortions stem from three factors: the presence of moral hazard, the use of objective functions by firms and banks that differs from the social welfare function, and the difficulty for the court to assess the safety care level exerted by the firms. We characterize cases where the liability sharing factor is above or below its full information perfect implementation level. We derive comparative statics results indicating the sensitivity of the liability sharing factor to changes in some parameters relevant for characterizing the optimal policy toward environmental protection or the prevention of industrial accidents. Nous caractérisons les distortions dans le partage de responsabilités entre banques et firmes qu'implique l'implémentation imparfaite des politiques gouvernementales. Ces distortions découlent de la présence de risque moral et de sélection adverse, de l'utilisation de fonctions-objectifs par les firmes et les banques diffèrentes de la fonction de bien-être social, et de la difficulté des cours de justice d'évaluer le niveau de précaution exercé par les firmes. Nous montrons l'existence de divers cas où le partage de responsabilités est supérieur ou inférieur au partage optimal en information et implémentation parfaites. Nous obtenons des résultats de statique comparée illustrant la sensibilité du partage des responsabilités aux paramètres pertinents à la détermination d'une politique optimale de protection environnementale ou de prévention d'accidents industriels.

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File URL: http://www.cirano.qc.ca/files/publications/2007s-04.pdf
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Paper provided by CIRANO in its series CIRANO Working Papers with number 2007s-04.

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Length: 43 pages
Date of creation: 01 Mar 2007
Date of revision:
Handle: RePEc:cir:cirwor:2007s-04
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  1. BOYER, Marcel, 1995. "Environmental Protection Producer Insolvency and Lender Liability," Cahiers de recherche 9557, Universite de Montreal, Departement de sciences economiques.
  2. Karine Gobert & Michel Poitevin, 1998. "Environmental Risks: Should Banks Be Liable?," CIRANO Working Papers 98s-39, CIRANO.
  3. Marcel Boyer & Tracy Lewis & Wei Lin Liu, 1996. "Setting Standards for Credible Compliance and Law Enforcement," CIRANO Working Papers 96s-27, CIRANO.
  4. Andrew F. Daughety & Jennifer F. Reinganum, 2003. "Markets, Torts and Social Inefficiency," Vanderbilt University Department of Economics Working Papers 0308, Vanderbilt University Department of Economics.
  5. Rohan Pitchford, 2001. "How Liable Should a Lender Be? The Case of Judgment-Proof Firms and Environmental Risk: Reply," American Economic Review, American Economic Association, vol. 91(3), pages 739-745, June.
  6. repec:dgr:kubcen:200033 is not listed on IDEAS
  7. Marcel Boyer & Donatella Porrini, 2000. "Law versus Regulation: A Political Economy Model of Instrument Choice in Environmental Policy," CIRANO Working Papers 2000s-57, CIRANO.
  8. Marcel Boyer & Donatella Porrini, 2002. "Modeling the Choice Between Regulation and Liability in Terms of Social Welfare," CIRANO Working Papers 2002s-13, CIRANO.
  9. 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, vol. 23(4), pages 453-475, December.
  10. Marcel Boyer & Jean-Jacques Laffont, 1994. "Environmental Risks and Bank Liability," CIRANO Working Papers 94s-22, CIRANO.
  11. Feess, E. & Hege, U., 2000. "Environmental harm and financial responsibility," Other publications TiSEM 7122a4d0-683c-49ed-a55f-0, Tilburg University, School of Economics and Management.
  12. 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, vol. 91(3), pages 724-730, June.
  13. 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.
  14. 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, vol. 13(1), pages 232-58, April.
  15. Pitchford, Rohan, 1995. "How Liable Should a Lender Be? The Case of Judgment-Proof Firms and Environmental Risk," American Economic Review, American Economic Association, vol. 85(5), pages 1171-86, December.
  16. Marcel Boyer & Philippe Mahenc & Michel Moreaux, 2007. "Environmental Protection, Consumer Awareness, Product Characteristics, and Market Power," CIRANO Working Papers 2007s-05, CIRANO.
  17. Marcel Boyer & Donatella Porrini, 2002. "The Choice of Instruments for Environmental Policy: Liability or Regulation?," CIRANO Working Papers 2002s-17, CIRANO.
  18. Innes, Robert, 2004. "Enforcement costs, optimal sanctions, and the choice between ex-post liability and ex-ante regulation," International Review of Law and Economics, Elsevier, vol. 24(1), pages 29-48, March.
  19. 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.
  20. Dieter Balkenborg, 2004. "On extended liability in a model of adverse selection," Discussion Papers 0404, Exeter University, Department of Economics.
  21. Eberhard Feess & Ulrich Hege, 2000. "Environmental Harm and Financial Responsibility*," The Geneva Papers on Risk and Insurance - Issues and Practice, Palgrave Macmillan, vol. 25(2), pages 220-234, April.
  22. 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.
  23. Segerson, Kathleen & Tietenberg, Tom, 1992. "The structure of penalties in environmental enforcement: An economic analysis," Journal of Environmental Economics and Management, Elsevier, vol. 23(2), pages 179-200, September.
  24. repec:ner:tilbur:urn:nbn:nl:ui:12-85388 is not listed on IDEAS
  25. Shavell, Steven, 1993. "The Optimal Structure of Law Enforcement," Journal of Law and Economics, University of Chicago Press, vol. 36(1), pages 255-87, April.
  26. Newman, Harry A. & Wright, David W., 1990. "Strict liability in a principal-agent model," International Review of Law and Economics, Elsevier, vol. 10(3), pages 219-231, December.
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