Optimal Structure of Penalties with Judgment-Proof Injurers

Guillaume Pommey ()
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Guillaume Pommey: DEF, University of Rome "Tor Vergata", http://www.ceistorvergata.it

No 622, CEIS Research Paper from Tor Vergata University, CEIS

Abstract: I characterize the optimal regulation of a firm constituted by potential judgment-proof agents. I investigate two cases: (i) A principal hires an agent to undertake a prevention effort on their behalf; (ii) Two agents are jointly responsible of undertaking a prevention effort. In both cases, agents are in charge of exerting an unobservable level of safety care to reduce the probability of an accident that may occur due to the firm risky activity. Agents are called judgment proof when their final wealth is not enough to pay for the monetary penalties imposed by the regulator. I show that the standard Equivalence Theorem, stating that the distribution of penalties among injurers is irrelevant, does not hold in this context. Instead, in a principal-agent firm, the optimal regulation requires to fully target the principal if the agent can be subject to judgment proofness. In a two-agent firm, the optimal regulation consists in an almost equal sharing of penalties among agents.

Keywords: Moral Hazard; Regulation; Limited liability; Judgment Proofness (search for similar items in EconPapers)
JEL-codes: D86 G33 K13 K32 (search for similar items in EconPapers)
Pages: 30 pages
Date: 2026-06-16, Revised 2026-06-16
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