Environmental Risks and Bank Liability
The 1980 Comprehensive Environmental Response, Compensation and Liability Act in the US has extended the tools of the Environmental Protection Agency to recover cleanup costs caused by pollution damages from the liable parties. In particular, the banks who finance the firms causing environmental damages may be considered liable. In various court cases, banks have been found liable, while they have been exempted in others. We develop a multipricipal-agent model in which the insurance sector may insure the firm for the pollution risk and the bank may lend money for investment. Under complete information of the bank about the firm's activities, the limited liability of the firm induces excessive investment and sufficient care but full liability of the bank creates the appropriate internalization of the environmental risk. This rationalization of the law must be qualified because in general the bank suffers from agency problems (adverse selection and moral hazard) with respect to the firm. In the adverse selection case, full liability of the bank leads to underinvestment. Partial liability is better but may fail to implement the optimal second best allocation. In the case of moral hazard, full responsibility is killing the project too often while still leading to low care too often. Partial responsibility may achieve the second best optimal allocation but in some cases the level of responsibility necessary to induce the proper level of care is too high for the project to be financed by the bank. Le Comprehensive Environmental Response, Compensation and Liability Act [CRECLA] de 1980 aux États-Unis a donné à l'Agence de protection de l'environnement des pouvoirs de recouvrement des coûts de décontamination auprès des parties responsables de la pollution. Les banques des entreprises concernées peuvent, en particulier, être tenues responsables des dommages et elles l'ont effectivement été dans certains cas. Nous proposons ici un modèle principal-agent avec un secteur assur
(This abstract was borrowed from another version of this item.)
|Date of creation:||1995|
|Contact details of provider:|| Postal: CP 6128, Succ. Centre-Ville, Montréal, Québec, H3C 3J7|
Phone: (514) 343-6540
Fax: (514) 343-5831
Web page: http://www.sceco.umontreal.ca
More information through EDIRC
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Evan F. Koenig, 1985. "Indirect Methods for Regulating Externalities Under Uncertainty," The Quarterly Journal of Economics, Oxford University Press, vol. 100(2), pages 479-493.
- Bolton, Patrick & Scharfstein, David S, 1990. "A Theory of Predation Based on Agency Problems in Financial Contracting," American Economic Review, American Economic Association, vol. 80(1), pages 93-106, March.
- Brander, James A. & Lewis, Tracy R., 1986. "Oligopoly and Financial Structure: The Limited Liability Effect," American Economic Review, American Economic Association, vol. 76(5), pages 956-970, December.
- Beaudry, Paul & Boyer, Marcel & Poitevin, Michel, 1993.
"Le rôle du collatéral dans le report des investissements en présence d’asymétries d’information,"
Société Canadienne de Science Economique, vol. 69(1), pages 71-90, mars.
- Beaudry, P. & Boyer, M. & Poitevin, M., 1992. "Le role du collateral dans le report des investissements en presence d'asymetries d'information," Cahiers de recherche 9205, Universite de Montreal, Departement de sciences economiques.
- Beaudry, P. & Boyer, M. & Poitevin, M., 1992. "Le role du collateral dans le report des investissements en presence d'asymetries d'information," Cahiers de recherche 9205, Centre interuniversitaire de recherche en économie quantitative, CIREQ.
- Demski, Joel S. & Sappington, David E. M. & Spiller, Pablo T., 1988. "Incentive schemes with multiple agents and bankruptcy constraints," Journal of Economic Theory, Elsevier, vol. 44(1), pages 156-167, February.
- Sandler, Todd & Sterbenz, Frederic P., 1988. "Externalities, pigouvian corrections, and risk attitudes," Journal of Environmental Economics and Management, Elsevier, vol. 15(4), pages 488-504, December.
- Michael T. Olexa, 1991. "Contaminated Collateral and Lender Liability: CERCLA and the New Age Banker," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 73(5), pages 1388-1393.
- Townsend, Robert M., 1979. "Optimal contracts and competitive markets with costly state verification," Journal of Economic Theory, Elsevier, vol. 21(2), pages 265-293, October.
- Robert M. Townsend, 1979. "Optimal contracts and competitive markets with costly state verification," Staff Report 45, Federal Reserve Bank of Minneapolis.
- Sappington, David, 1983. "Limited liability contracts between principal and agent," Journal of Economic Theory, Elsevier, vol. 29(1), pages 1-21, February.
- Hyde, Charles E & Rausser, Gordon C & Simon, Leo K, 2000. "Regulating Multiple Polluters: Deterrence and Liability Allocation," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 41(2), pages 495-521, May.
- Douglas Gale & Martin Hellwig, 1985. "Incentive-Compatible Debt Contracts: The One-Period Problem," Review of Economic Studies, Oxford University Press, vol. 52(4), pages 647-663. Full references (including those not matched with items on IDEAS)
When requesting a correction, please mention this item's handle: RePEc:mtl:montde:9501. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Sharon BREWER)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.