Minimum Asset Requirements and Compulsory Liability Insurance as Solutions to the Judgment-Proof Problem
Harvard Law School; National Bureau of Economic Research (NBER)
Harvard Law and Economics Discussion Paper No. 456
Minimum asset and liability insurance requirements must often be met in order for parties to participate in potentially harmful activities. Such financial responsibility requirements may improve parties' decisions whether to engage in harmful activities and, if so, their efforts to reduce risk. However, the requirements may undesirably prevent some parties with low assets from engaging in activities. Liability insurance requirements tend to improve parties' incentives to reduce risk when insurers can observe levels of care, but dilute incentives to reduce risk when insurers cannot observe levels of care. In the latter case, compulsory liability insurance may be inferior to minimum asset requirements.
Number of Pages in PDF File: 43
JEL Classification: D00, K13, K20, L5
Date posted: August 23, 2004
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