Comparison of liability sharing rules for environmental damage: An experiment with different levels of solvency

Civil liability is the legal requirement to compensate victims when damage is caused. When two firms jointly cause environmental damage, their liability depends on the applicable liability rule and on the solvency level of each firm. Under non-joint liability, each injurer is liable for part of the damage up to its financial capacity. Under joint and several liability, if damages cannot be recovered from one in jurer for insolvency reasons, they are borne by the other one to the extent that it is solvent. We theoretically and experimentally investigate the impact of these two liability rules in terms of incentives to care, varying according to the degree of (in)solvency of each firm. We show that when there is (at least) one insolvent firm, non-joint liability leads to higher social welfare than joint and several liability, whereas the latter should be preferred in the presence of solvent firms only.