Environmental Harm and Financial Responsibility&ast

Eberhard Feess () and Ulrich Hege

The Geneva Papers on Risk and Insurance - Issues and Practice, 2000, vol. 25, issue 2, 220-234

Abstract: Firms will exert too little care due to a limited liability effect if damages are likely to exceed their equity. This is particularly important for environmental and product liability and motivates the current discussion about mandatory insurance and extending liability to creditors. We model the choice of the care level as a moral hazard problem that can be solved through costly monitoring. Conventional strict liability and lender liability both lead to distortions in the capital structure and to inefficiently low care. By contrast, mandatory liability coverage (financial responsibility) that can be satisfied by either an insurance contract or a lender guarantee leads to the first best allocation if managers can self-insure, and to the second best if managers cannot self-insure but choose to be monitored. The Geneva Papers on Risk and Insurance (2000) 25, 220–234. doi:10.1111/1468-0440.00061

Date: 2000
References: Add references at CitEc
Citations: View citations in EconPapers (14)

Downloads: (external link)
http://www.palgrave-journals.com/gpp/journal/v25/n2/pdf/2500061a.pdf Link to full text PDF (application/pdf)
http://www.palgrave-journals.com/gpp/journal/v25/n2/full/2500061a.html Link to full text HTML (text/html)
Access to full text is restricted to subscribers.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:pal:gpprii:v:25:y:2000:i:2:p:220-234

Ordering information: This journal article can be ordered from
http://www.springer.com/finance/journal/41288/PS2

Access Statistics for this article

The Geneva Papers on Risk and Insurance - Issues and Practice is currently edited by Christophe Courbage

More articles in The Geneva Papers on Risk and Insurance - Issues and Practice from Palgrave Macmillan, The Geneva Association Contact information at EDIRC.
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().