Optimal Liability Sharing and Court Errors: An Exploratory Analysis

25 Pages Posted: 16 Jul 2009

See all articles by Marcel Boyer

Marcel Boyer

CIRANO, Université de Monréal

Donatella Porrini

University of Salento - Department of Economics and Mathematics and Statistics

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Abstract

We focus in this paper on the effects of court errors on the optimal sharing of liability between firms and financiers, as an environmental policy instrument. Using a structural model of the interactions between firms, financial institutions, governments and courts we show, through numerical simulations, the distortions in liability sharing between firms and financiers that the imperfect implementation of government policies implies. We consider in particular the role played by the efficiency of the courts in avoiding Type I (finding an innocent firm guilty of inappropriate care) and Type II (finding a guilty firm innocent of inappropriate care) errors. This role is considered in a context where liability sharing is already distorted (when compared with first best values) due not only to the courts’ own imperfect assessment of safety care levels exerted by firm but also to the presence of moral hazard and adverse selection in financial contracting, as well as of non-congruence of objectives between firms and financiers on the one hand and social welfare maximization on the other. Our results indicate that an increase in the efficiency of the court system in avoiding errors raises safety care levels, thereby reducing the probability of accident, and allowing the social welfare maximizing government to impose a lower liability [higher] share for firms [financiers] as well as a lower standard level of care.

Keywords: Environmental Policy, Court Efficiency, Liability Sharing, Regulation

JEL Classification: D82, G32, K13, K32, Q28

Suggested Citation

Boyer, Marcel and Porrini, Donatella, Optimal Liability Sharing and Court Errors: An Exploratory Analysis. CLEA 2009 Annual Meeting Paper, Available at SSRN: https://ssrn.com/abstract=1433691 or http://dx.doi.org/10.2139/ssrn.1433691

Marcel Boyer

CIRANO, Université de Monréal ( email )

1400-1130 Sharbrooke St. West
Montreal, Quebec H3A 2M8
Canada
514 985-4000 (Phone)
514-985-4039 (Fax)

HOME PAGE: http://www.cirano.qc.ca/~boyerm

Donatella Porrini

University of Salento - Department of Economics and Mathematics and Statistics ( email )

Piazza Tancredi, n7
Lecce, 73100
Italy

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