Comparisons of the Incentive for Insolvency under Different Legal Regimes

Elizabeth Klee and Lewis Kornhauser

Journal of Legal Studies, 2007, vol. 36, issue 1, pages 141-170

Abstract: This paper compares the effects of joint and several liability on capital and production decisions with the effects of several-only liability in the context of hazardous-waste generation. Our main result shows that increased potential liability causes firms to decrease asset exposure but may also lead firms to create less waste. First, we find that both several-only and joint and several liability induce firms to go bankrupt more often and create more waste than is socially optimal. Then we find that, for a given level of funds, joint and several liability induces firms to go bankrupt more often and to create more waste than does several-only liability. This implies that society will be responsible for a larger share of cleanup under joint and several liability than under several-only liability. Finally, we show that firms with potentially higher liabilities for cleanup will raise fewer funds, creating "smaller" firms and thus the possibility of less waste generated overall. (c) 2007 by The University of Chicago. All rights reserved..

Date: 2007

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