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Optimal Structure of Penalties with Judgment-Proof Injurers

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Abstract

I characterize the optimal regulation of a firm constituted by potential judgment-proof agents. I investigate two cases: (i) A principal hires an agent to undertake a prevention effort on their behalf; (ii) Two agents are jointly responsible of undertaking a prevention effort. In both cases, agents are in charge of exerting an unobservable level of safety care to reduce the probability of an accident that may occur due to the firm risky activity. Agents are called judgment proof when their final wealth is not enough to pay for the monetary penalties imposed by the regulator. I show that the standard Equivalence Theorem, stating that the distribution of penalties among injurers is irrelevant, does not hold in this context. Instead, in a principal-agent firm, the optimal regulation requires to fully target the principal if the agent can be subject to judgment proofness. In a two-agent firm, the optimal regulation consists in an almost equal sharing of penalties among agents.

Suggested Citation

  • Guillaume Pommey, 2026. "Optimal Structure of Penalties with Judgment-Proof Injurers," CEIS Research Paper 622, Tor Vergata University, CEIS, revised 16 Jun 2026.
    • Handle: RePEc:rtv:ceisrp:622
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    References listed on IDEAS

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    1. 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 1171-1186, December.
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    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
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law

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