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Minimum Asset Requirements and Compulsory Liability Insurance As Solutions to the Judgment-Proof Problem

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  • Steven Shavell

Abstract

Minimum asset and liability insurance requirements must often be met in order for parties to participate in potentially harmful activities. Such financial responsibility requirements may improve parties' decisions whether to engage in harmful activities and, if so, their efforts to reduce risk. However, the requirements may undesirably prevent some parties with low assets from engaging in activities. Liability insurance requirements tend to improve parties' incentives to reduce risk when insurers can observe levels of care, but dilute incentives to reduce risk when insurers cannot observe levels of care. In the latter case, compulsory liability insurance may be inferior to minimum asset requirements.

Suggested Citation

  • Steven Shavell, 2004. "Minimum Asset Requirements and Compulsory Liability Insurance As Solutions to the Judgment-Proof Problem," NBER Working Papers 10341, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:10341 Note: LE
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    File URL: http://www.nber.org/papers/w10341.pdf
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    References listed on IDEAS

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    1. Jost, Peter-J., 1996. "Limited liability and the requirement to purchase insurance," International Review of Law and Economics, Elsevier, vol. 16(2), pages 259-276, June.
    2. T. Randolph Beard, 1990. "Bankruptcy and Care Choice," RAND Journal of Economics, The RAND Corporation, pages 626-634.
    3. 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 232-258, April.
    4. Polborn, Mattias K., 1998. "Mandatory insurance and the judgment-proof problem," International Review of Law and Economics, Elsevier, vol. 18(2), pages 141-146, June.
    5. Boyer, Marcel & Laffont, Jean-Jacques, 1997. "Environmental risks and bank liability," European Economic Review, Elsevier, pages 1427-1459.
    6. Kahane, Yehuda, 1977. "Capital adequacy and the regulation of financial intermediaries," Journal of Banking & Finance, Elsevier, vol. 1(2), pages 207-218, October.
    7. Yolande Hiriart & David Martimort, 2006. "The benefits of extended liability," RAND Journal of Economics, RAND Corporation, pages 562-582.
    8. Rochet, Jean-Charles, 1992. "Capital requirements and the behaviour of commercial banks," European Economic Review, Elsevier, vol. 36(5), pages 1137-1170, June.
    9. Kim, Daesik & Santomero, Anthony M, 1988. " Risk in Banking and Capital Regulation," Journal of Finance, American Finance Association, vol. 43(5), pages 1219-1233, December.
    10. Steven Shavell, 2002. "Minimum Asset Requirements," NBER Working Papers 9335, National Bureau of Economic Research, Inc.
    11. Shavell, S., 1986. "The judgment proof problem," International Review of Law and Economics, Elsevier, vol. 6(1), pages 45-58, June.
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    Cited by:

    1. Yeon-Koo Che & Kathryn E. Spier, 2008. "Strategic judgment proofing," RAND Journal of Economics, RAND Corporation, vol. 39(4), pages 926-948.
    2. Francisco Ramos Romeu, 2010. "An economic theory of the regulation of preliminary measures," European Journal of Law and Economics, Springer, vol. 30(3), pages 267-300, December.
    3. Buccirossi, Paolo & Spagnolo, Giancarlo, 2006. "Optimal Fines in the Era of Whistleblowers," CEPR Discussion Papers 5465, C.E.P.R. Discussion Papers.
    4. Juan José Ganuza & Fernando Gómez, 2003. "Optimal negligence rule under limited liability," Economics Working Papers 759, Department of Economics and Business, Universitat Pompeu Fabra, revised May 2004.

    More about this item

    JEL classification:

    • D00 - Microeconomics - - General - - - General
    • K13 - Law and Economics - - Basic Areas of Law - - - Tort Law and Product Liability; Forensic Economics

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