Risk Aversion, Liability Rules, and Safety

Joshua Graff Zivin, Richard E. Just and David Zilberman ()

No 9678, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: This paper investigates the performance of liability rules in two-party stochastic externality problems where negotiations are feasible and side payments are based on the realized level of externalities. Results show that an increase in polluter liability does not necessarily increase safety or efficiency in cases where the polluter is risk neutral. Complete polluter liability is found to yield Pareto optimality. When either party is risk averse, an increase in polluter liability may sometimes reduce safety and efficiency. If the polluter is risk neutral and the victim is risk averse, Pareto optimality is only achieved by assigning full liability on the polluter, i.e. giving the victim complete property rights to a clean environment. If the polluter is risk averse and the victim is risk neutral, no level of polluter liability is optimal. In this case, optimality can only be achieved through a contract on abatement activities, such that the risk-averse polluter receives a guaranteed payment regardless of the stochastic outcome.

JEL-codes: D8 K0 (search for similar items in EconPapers)
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Date: Written 2003-05
Note: ED EEE
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Journal Article: Risk Aversion, Liability Rules, and Safety (2005)
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