On extended liability in a model of adverse selection

Dieter Balkenborg

No 404, Discussion Papers from University of Exeter, Department of Economics

Abstract: We consider a model where a judgment-proof firm needs finance to realize a project. This project might cause an environmental hazard with a probability that is the private knowledge of the firm. Thus there is asymmetric information with respect to the environmental riskiness of the project. We consider the implications of a simple joint and strict liability rule on the lender and the firm where, in case of a damage, the lender is responsible for that part of the liability which the judgment-proof firm cannot pay. We use a weighted version of the neutral bargaining solution (Myerson 1983 / 1984) to determine the financial contract between the lender and the firm. In the given model we show that either full or a punitive liability is optimal.

Keywords: judgement proofness; extended liability; neutral bargaining solution. (search for similar items in EconPapers)
JEL-codes: G33 K13 K32 Q38 (search for similar items in EconPapers)
Date: 2004-11
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Citations: View citations in EconPapers (1)

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