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

See all articles by Steven Shavell

Steven Shavell

Harvard Law School; National Bureau of Economic Research (NBER)

Date Written: June 1995

Abstract

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

Shavell, Steven, The Optimal Level of Corporate Liability Given the Limited Ability of Corporations to Penalize Their Employees (June 1995). Harvard Law and Economics Working Paper #160. Available at SSRN: https://ssrn.com/abstract=10025

Steven Shavell (Contact Author)

Harvard Law School ( email )

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National Bureau of Economic Research (NBER)

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