Minimum Asset Requirements and Compulsory Liability Insurance As Solutions to the Judgment-Proof Problem

Steven Shavell ()

No 10341, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Minimum asset and liability insurance requirements must often be met in order for parties to participate in potentially harmful activities. Such financial responsibility requirements may improve parties' decisions whether to engage in harmful activities and, if so, their efforts to reduce risk. However, the requirements may undesirably prevent some parties with low assets from engaging in activities. Liability insurance requirements tend to improve parties' incentives to reduce risk when insurers can observe levels of care, but dilute incentives to reduce risk when insurers cannot observe levels of care. In the latter case, compulsory liability insurance may be inferior to minimum asset requirements.

JEL-codes: D00 K13 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ias and nep-law
Date: 2004-03
Note: LE
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