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On extended liability in a model of adverse selection


  • Dieter Balkenborg

    (Department of Economics, University of Exeter)


We consider a model where a judgment-proof firm needs finance to realize a project. This project might cause an environmental hazard with a probability that is the private knowledge of the firm. Thus there is asymmetric information with respect to the environmental riskiness of the project. We consider the implications of a simple joint and strict liability rule on the lender and the firm where, in case of a damage, the lender is responsible for that part of the liability which the judgment-proof firm cannot pay. We use a weighted version of the neutral bargaining solution (Myerson 1983 / 1984) to determine the financial contract between the lender and the firm. In the given model we show that either full or a punitive liability is optimal.

Suggested Citation

  • Dieter Balkenborg, 2004. "On extended liability in a model of adverse selection," Discussion Papers 0404, Exeter University, Department of Economics.
  • Handle: RePEc:exe:wpaper:0404

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    Cited by:

    1. Marcel Boyer & Donatella Porrini, 2007. "Sharing Liability Between Banks and Firms: The Case of Industrial Safety Risk," CIRANO Working Papers 2007s-04, CIRANO.

    More about this item


    judgement proofness; extended liability; neutral bargaining solution.;

    JEL classification:

    • K13 - Law and Economics - - Basic Areas of Law - - - Tort Law and Product Liability; Forensic Economics
    • K32 - Law and Economics - - Other Substantive Areas of Law - - - Energy, Environmental, Health, and Safety Law
    • Q38 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Nonrenewable Resources and Conservation - - - Government Policy (includes OPEC Policy)
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation


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