IDEAS home Printed from
   My bibliography  Save this paper

Large-scale risks and technological change: What about limited liability?


  • Julien Jacob
  • Sandrine Spaeter


We consider a firm that has to choose a technology to produce a given good. This technology drives a multiplicative large-scale risk of incident for Society: the total potential level of damage increases with the level of activity. Contrary to what is often argued in the literature, we show that limited liability can be more incentive for technical change than an unlimited liability rule, depending on the magnitude of the technological change and on the firm's size. In a second part of the paper, taxes are introduced. We show how manipulating the tax rate with respect to the technological choice made by the firm still enlarges the set of parameters that lead to technological change under a limited liability rule. Our normative results provide some arguments in favor of the limited liability rule, often considered as the main explanation of partial large-scale risk internalization by firms.

Suggested Citation

  • Julien Jacob & Sandrine Spaeter, 2010. "Large-scale risks and technological change: What about limited liability?," Working Papers of BETA 2010-12, Bureau d'Economie Théorique et Appliquée, UDS, Strasbourg.
  • Handle: RePEc:ulp:sbbeta:2010-12

    Download full text from publisher

    File URL:
    Download Restriction: no

    Other versions of this item:

    References listed on IDEAS

    1. Dari-Mattiacci, Giuseppe & De Geest, Gerrit, 2006. "When will judgment proof injurers take too much precaution?," International Review of Law and Economics, Elsevier, vol. 26(3), pages 336-354, September.
    2. T. Randolph Beard, 1990. "Bankruptcy and Care Choice," RAND Journal of Economics, The RAND Corporation, vol. 21(4), pages 626-634, Winter.
    3. Tim Friehe, 2007. "A note on judgment proofness and risk aversion," European Journal of Law and Economics, Springer, vol. 24(2), pages 109-118, October.
    4. Lee, Kangoh, 1998. "Risk Aversion and Self-Insurance-cum-Protection," Journal of Risk and Uncertainty, Springer, vol. 17(2), pages 139-150, November.
    5. 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.
    6. Neij, Lena, 2008. "Cost development of future technologies for power generation--A study based on experience curves and complementary bottom-up assessments," Energy Policy, Elsevier, vol. 36(6), pages 2200-2211, June.
    7. Parry, Ian W. H., 1995. "Optimal pollution taxes and endogenous technological progress," Resource and Energy Economics, Elsevier, vol. 17(1), pages 69-85, May.
    8. María-Eugenia Sanin & Skerdilajda Zanaj, 2011. "A Note on Clean Technology Adoption and its Influence on Tradeable Emission Permits Prices," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 48(4), pages 561-567, April.
    9. Boyer, Marcel & Laffont, Jean-Jacques, 1997. "Environmental risks and bank liability," European Economic Review, Elsevier, vol. 41(8), pages 1427-1459, August.
    10. Endres, Alfred, 1991. "The Economics of Accident Law: Discounted Expected Damage, Suboptimal Due Care Standards, and the Role of a "Negligence Tax."," Public Finance = Finances publiques, , vol. 46(2), pages 198-207.
    11. Coria, Jessica, 2009. "Taxes, permits, and the diffusion of a new technology," Resource and Energy Economics, Elsevier, vol. 31(4), pages 249-271, November.
    12. Fischer, Carolyn & Parry, Ian W. H. & Pizer, William A., 2003. "Instrument choice for environmental protection when technological innovation is endogenous," Journal of Environmental Economics and Management, Elsevier, vol. 45(3), pages 523-545, May.
    13. Dionne, Georges & Spaeter, Sandrine, 2003. "Environmental risk and extended liability: The case of green technologies," Journal of Public Economics, Elsevier, vol. 87(5-6), pages 1025-1060, May.
    14. Neij, Lena, 1997. "Use of experience curves to analyse the prospects for diffusion and adoption of renewable energy technology," Energy Policy, Elsevier, vol. 25(13), pages 1099-1107, November.
    15. Ehrlich, Isaac & Becker, Gary S, 1972. "Market Insurance, Self-Insurance, and Self-Protection," Journal of Political Economy, University of Chicago Press, vol. 80(4), pages 623-648, July-Aug..
    16. Yolande Hiriart & David Martimort, 2006. "The benefits of extended liability," RAND Journal of Economics, RAND Corporation, vol. 37(3), pages 562-582, September.
    17. Endres, Alfred & Friehe, Tim, 2011. "R&D and abatement under environmental liability law: Comparing incentives under strict liability and negligence if compensation differs from harm," Energy Economics, Elsevier, vol. 33(3), pages 419-425, May.
    18. Downing, Paul B. & White, Lawrence J., 1986. "Innovation in pollution control," Journal of Environmental Economics and Management, Elsevier, vol. 13(1), pages 18-29, March.
    19. Endres, Alfred & Bertram, Regina, 2006. "The development of care technology under liability law," International Review of Law and Economics, Elsevier, vol. 26(4), pages 503-518, December.
    20. Giuseppe Dari-Mattiacci & Gerrit De Geest, 2005. "Judgment Proofness under Four Different Precaution Technologies," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 161(1), pages 1-38, March.
    21. Foulon, Jerome & Lanoie, Paul & Laplante, Benoit, 2002. "Incentives for Pollution Control: Regulation or Information?," Journal of Environmental Economics and Management, Elsevier, vol. 44(1), pages 169-187, July.
    22. Endres, Alfred & Friehe, Tim, 2011. "Incentives to diffuse advanced abatement technology under environmental liability law," Journal of Environmental Economics and Management, Elsevier, vol. 62(1), pages 30-40, July.
    23. Requate, Till, 1998. "Incentives to innovate under emission taxes and tradeable permits," European Journal of Political Economy, Elsevier, vol. 14(1), pages 139-165, February.
    24. Kobos, Peter H. & Erickson, Jon D. & Drennen, Thomas E., 2006. "Technological learning and renewable energy costs: implications for US renewable energy policy," Energy Policy, Elsevier, vol. 34(13), pages 1645-1658, September.
    25. Alfred Endres & Bianca Rundshagen & Regina Bertram, 2008. "Environmental Liability Law and Induced Technical Change: The Role of Spillovers," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 164(2), pages 254-279, June.
    26. Isoard, Stephane & Soria, Antonio, 2001. "Technical change dynamics: evidence from the emerging renewable energy technologies," Energy Economics, Elsevier, vol. 23(6), pages 619-636, November.
    27. Boyd, James & Ingberman, Daniel E, 1994. "Noncompensatory Damages and Potential Insolvency," The Journal of Legal Studies, University of Chicago Press, vol. 23(2), pages 895-910, June.
    28. Shavell, S., 1986. "The judgment proof problem," International Review of Law and Economics, Elsevier, vol. 6(1), pages 45-58, June.
    29. Baumann, Florian & Friehe, Tim & Grechenig, Kristoffel, 2011. "A note on the optimality of (even more) incomplete strict liability," International Review of Law and Economics, Elsevier, vol. 31(2), pages 77-82, June.
    30. 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.
    31. Viscusi, W Kip & Moore, Michael J, 1993. "Product Liability, Research and Development, and Innovation," Journal of Political Economy, University of Chicago Press, vol. 101(1), pages 161-184, February.
    32. Requate, Till & Unold, Wolfram, 2003. "Environmental policy incentives to adopt advanced abatement technology:: Will the true ranking please stand up?," European Economic Review, Elsevier, vol. 47(1), pages 125-146, February.
    33. repec:rje:randje:v:37:y:2006:3:p:562-582 is not listed on IDEAS
    34. Magat, Wesley A., 1978. "Pollution control and technological advance: A dynamic model of the firm," Journal of Environmental Economics and Management, Elsevier, vol. 5(1), pages 1-25, March.
    35. Milliman, Scott R. & Prince, Raymond, 1989. "Firm incentives to promote technological change in pollution control," Journal of Environmental Economics and Management, Elsevier, vol. 17(3), pages 247-265, November.
    Full references (including those not matched with items on IDEAS)


    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.

    Cited by:

    1. Meixing Dai, 2012. "External Constraint and Financial Crises with Balance Sheet Effects," International Economic Journal, Taylor & Francis Journals, vol. 26(4), pages 567-585, March.
    2. Julien Jacob, 2011. "Innovation and diffusion in risky industries under liability law: the case of “double-impact” innovations," Working Papers of BETA 2011-24, Bureau d'Economie Théorique et Appliquée, UDS, Strasbourg.
    3. Nicolas Lampach & Sandrine Spaeter, 2016. "The Efficiency of (strict) Liability Rules revised in Risk and Ambiguity," Working Papers of BETA 2016-29, Bureau d'Economie Théorique et Appliquée, UDS, Strasbourg.

    More about this item


    Technological risk; limited liability; incentives; technical choice; taxes.;

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • K39 - Law and Economics - - Other Substantive Areas of Law - - - Other
    • Q55 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Technological Innovation

    NEP fields

    This paper has been announced in the following NEP Reports:


    Access and download statistics


    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ulp:sbbeta:2010-12. 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: (). General contact details of provider: .

    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 CitEc recognized a reference but did not link an item in RePEc 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 RePEc Author Service 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.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.