Environmental risk and extended liability: The case of green technologies

Georges Dionne () and Sandrine Spaeter
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Sandrine Spaeter: Université Louis Pasteur

No 98-12, Working Papers from HEC Montreal, Canada Research Chair in Risk Management

Abstract: We analyze the effect of extending environmental risk to banks. We assume that the firm needs external funds to invest in green technology and reduce the risk of environmental damage. Prevention may affect the distribution of both environmental losses and operating revenues. We show that, under moral hazard, the firm does not always invest less in prevention than the optimal social level. We also show that extending liability may improve both the level of prevention and the level of compensation. However, extended liability always leads to an increased probability of bankruptcy for the firm. We also obtain that partial extended liability improves social welfare, while full extended liability does not.

Keywords: Environmental risk; limited liability; extended liability; investment in prevention; moral hazard (search for similar items in EconPapers)
JEL-codes: D21 D82 G33 K32 (search for similar items in EconPapers)
Pages: 50 pages
Date: 1998-08-01
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Related works:
Journal Article: Environmental risk and extended liability: The case of green technologies (2003)
Working Paper: Environmental Risk and Extended Liability: the Case of Green Technologies (1998)
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Persistent link: https://EconPapers.repec.org/RePEc:ris:crcrmw:1998_012

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