Insolvency and Incentives for Efficient Care

54 Pages Posted: 14 Mar 2018

See all articles by Michael Ohlrogge

Michael Ohlrogge

New York University School of Law

Date Written: March 1, 2018

Abstract

Limited liability has long been recognized to incentivize owners of firms near bankruptcy to take suboptimal care to prevent harm to third parties. I use violations of the Clean Water Act to study these incentives. I show that as firms approach bankruptcy (as measured by their credit ratings) they indeed become more likely to violate laws designed to protect third parties. A move from the best to worst credit rating is associated with a seven-fold increase in violation frequency. These results are robust to time and company fixed effects, an instrumental variables strategy, and controls for company liquidity, leverage and profitability. I also propose a policy solution that can improve incentives for firms near bankruptcy. This proposal calls for agencies such as the EPA to increase monitoring of firms closer to insolvency. This can be implemented without legislative changes, and without disrupting foundations of corporate law such as limited liability.

Keywords: Limited Liability; Involuntary Creditor; Bankruptcy; Efficient Care; Tort

Suggested Citation

Ohlrogge, Michael, Insolvency and Incentives for Efficient Care (March 1, 2018). Available at SSRN: https://ssrn.com/abstract=3136775 or http://dx.doi.org/10.2139/ssrn.3136775

Michael Ohlrogge (Contact Author)

New York University School of Law ( email )

40 Washington Square South
New York, NY 10012-1099
United States

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