TITLE:
Accident Prevention and Damage Reduction in an Extended Liability Scheme
AUTHORS:
Atsuo Tomori
KEYWORDS:
Extending Liability, Accident Prevention, Damage Reduction
JOURNAL NAME:
Theoretical Economics Letters,
Vol.5 No.2,
April
8,
2015
ABSTRACT: This study explores how
an extended liability scheme affects a judgment-proof firm’s precaution levels
to prevent accidents and reduce damage when the regulator cannot observe the
firm’s private transactions. For this purpose, we incorporate the firm’s
precautions to reduce damage into the model proposed by Hiriart and Martimort [1], who
only investigated accident prevention. Then, we examine the optimal regulation
of a firm that takes measures to reduce not only the probability of a serious
environmental accident but also the extent of the damage of such an accident
and analyze how the levels of these two types of efforts are affected by
introducing an extended liability scheme. We expand the results of Hiriart and
Martimort [1] by showing that extending liability to the firm’s stakeholders may
improve social welfare by enhancing accident prevention efforts and by
weakening damage reduction efforts even when the regulator cannot observe the
private transactions between the firm and its stakeholders.