The Optimal Level of Corporate Liability Given the Limited Ability of Corporations to Penalize Their Employees
Harvard Law and Economics Working Paper #160
Posted: 3 Jul 1998
Date Written: June 1995
A central conclusion of the economic analysis of corporate liability is that the level of liability should generally equal harm. However, this result does not necessarily hold when the ability of corporations to impose penalties on employees for causing harm is limited (usually at most dismissal from their jobs), implying that employees' motives to prevent harm may be inadequate. Firms can partially remedy this problem by paying employees an above-market wage, because that will raise employees' desire to keep their jobs. But a firm's incentive to pay such a supernormal wage deviates from the socially desirable incentive to pay supernormal wages. This leads to the result that optimal level of liability can be either above or below harm.
JEL Classification: G38, J39, K22
Suggested Citation: Suggested Citation