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Risky Activities and Strict Liability Rules: Delegating Safety

  • Gérard Mondello

    (University of Nice Sophia Antipolis, CREDECO, GREDEG, UMR 6727, CNRS)

This paper studies the delegation of activities that pose serious risks to health and the environment in an economy regulated by strict liability schemes. Strict liability induces judgment-proof possibilities. Two civil liability regimes are then compared: a strict liability scheme and a capped strict liability one. The argument is led under a twofold asymmetric information assumption between the principal and the agent: the efficiency level in effort for safety and the agent’s level of wealth. The paper shows that standard strict liability under information asymmetries deters the efficient agent to compete and favors adverse selection. Then, under conditions, a capped strict liability regime is a better regime than a standard strict liability one because it induces the efficient agent to supply the level of safety effort equivalent to the first best solution. The counterpart is the perception of an informational rent by the efficient agent. At the optimum, this rent is minimized by the efficient contract supplied by the principal.

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Paper provided by Fondazione Eni Enrico Mattei in its series Working Papers with number 2010.103.

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Date of creation: Sep 2010
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Handle: RePEc:fem:femwpa:2010.103
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  1. Boyer, M. & Laffont, J.J., 1995. "Environmental Risks and Bank Liability," Cahiers de recherche 9501, Universite de Montreal, Departement de sciences economiques.
  2. Yolande Hiriart & David Martimort, 2006. "The benefits of extended liability," RAND Journal of Economics, RAND Corporation, vol. 37(3), pages 562-582, 09.
  3. Giuseppe Dari-Mattiacci, 2006. "Limiting Limited Liability," Economics Bulletin, AccessEcon, vol. 11(1), pages 1-7.
  4. Shavell, S., 1986. "The judgment proof problem," International Review of Law and Economics, Elsevier, vol. 6(1), pages 45-58, June.
  5. Thomas J. Miceli & Kathleen Segerson, 2001. "A Note on Optimal Care by Wealth-Constrained Injurers," Working papers 2002-44, University of Connecticut, Department of Economics, revised May 2002.
  6. repec:dgr:uvatin:20060070 is not listed on IDEAS
  7. Baron, David P & Myerson, Roger B, 1982. "Regulating a Monopolist with Unknown Costs," Econometrica, Econometric Society, vol. 50(4), pages 911-30, July.
  8. Schmitz, Patrick W., 2000. "On the joint use of liability and safety regulation," International Review of Law and Economics, Elsevier, vol. 20(3), pages 371-382, September.
  9. 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.
  10. Marcel Boyer & Donatella Porrini, 2007. "Sharing Liability Between Banks and Firms: The Case of Industrial Safety Risk," CIRANO Working Papers 2007s-04, CIRANO.
  11. 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.
  12. Marcel Boyer & Donatella Porrini, 2008. "The Efficient Liability Sharing Factor For Environmental Disasters: Lessons For Optimal Insurance Regulation," CIRANO Working Papers 2008s-03, CIRANO.
  13. BOYER, Marcel, 1995. "Environmental Protection Producer Insolvency and Lender Liability," Cahiers de recherche 9557, Universite de Montreal, Departement de sciences economiques.
  14. 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.
  15. Faure, Michael & Wang, Hui, 2008. "Financial caps for oil pollution damage: A historical mistake?," Marine Policy, Elsevier, vol. 32(4), pages 592-606, July.
  16. repec:ebl:ecbull:v:11:y:2006:i:1:p:1-7 is not listed on IDEAS
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