How Liable Should a Lender Be? The Case of Judgment-Proof Firms and Environmental Risk

Rohan Pitchford

American Economic Review, 1995, vol. 85, issue 5, 1171-86

Abstract: Recently, U.S. environmental law has shown a tendency toward increased lender liability. A model of a potentially judgment-proof owner of a firm, a lender, and a potential victim is developed in which this policy can increase accident frequency and reduce efficiency. Full, partial, and zero lender-liability rules and a minimum equity requirement are analyzed. Partial lender liability and an equivalent minimum equity requirement deliver the highest level of efficiency, although the former can deliver a higher contribution by the lender to the victim than the latter. Policy and empirical implications are also discussed. Copyright 1995 by American Economic Association.

Date: 1995
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