 Safety monitoring, capital structure, and "financial responsibility"Ulrich Hege and Eberhard Feess () Post-Print from HAL Abstract: We compare different modes of extending liability to third parties motivated by the problem that firms may exert too little preventive care if damages are likely to exceed their equity. In our model, moral hazard about the choice of care that can be mitigated through stochastic monitoring, we show that the optimal allocation can always be implemented by a liability regime of full "financial responsibility," that is mandatory liability coverage for total harm that can be fulfilled either by, an insurer or by a lender. All other liability regimes are shown to lead to distortions in the capital and debt structure. The difference between our results and related models finding liability below the level of harm to be optimal is explained by our treatment of safety monitoring and of optimal monitoring-dependent insurance contracts. The mechanism is robust vis-a-vis the introduction of risk aversion, provided that optimal wealth transfer are taken into account. Keywords: Lender liability; Compulsory insurance; Choice between private and public debt; Limited liability effect (search for similar items in EconPapers) Published in International Review of Law and Economics, 2003, Vol.23,n°3, pp.323-339. ⟨10.1016/j.irle.2003.09.008⟩ There are no downloads for this item, see the EconPapers FAQ for hints about obtaining it. Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-00459915 DOI: 10.1016/j.irle.2003.09.008 Access Statistics for this paper More papers in Post-Print from HAL |
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