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The benefits of extended liability

The benefits of extended liability We characterize the optimal regulation of a firm that undertakes an environmentally risky activity. This firm (the agent)is protected by limited liability and bound by contract to a stakeholder (the principal). The level of safety care exerted by the agent is nonobservable. This level of care depends both on the degree of incompleteness of the regulatory contract and on the allocation of bargaining power between the principal and the agent. Increasing the wealth of the principal that can be seized upon an accident has no value when private transactions are regulated but might otherwise strictly improve welfare. An incomplete regulation supplemented by an ex post extended liability regime can sometime achieve the second best. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png The Rand Journal of Economics Wiley

The benefits of extended liability

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References (34)

Publisher
Wiley
Copyright
Copyright © 2006 Wiley Subscription Services, Inc., A Wiley Company
ISSN
0741-6261
eISSN
1756-2171
DOI
10.1111/j.1756-2171.2006.tb00031.x
Publisher site
See Article on Publisher Site

Abstract

We characterize the optimal regulation of a firm that undertakes an environmentally risky activity. This firm (the agent)is protected by limited liability and bound by contract to a stakeholder (the principal). The level of safety care exerted by the agent is nonobservable. This level of care depends both on the degree of incompleteness of the regulatory contract and on the allocation of bargaining power between the principal and the agent. Increasing the wealth of the principal that can be seized upon an accident has no value when private transactions are regulated but might otherwise strictly improve welfare. An incomplete regulation supplemented by an ex post extended liability regime can sometime achieve the second best.

Journal

The Rand Journal of EconomicsWiley

Published: Sep 1, 2006

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