Minimum Asset Requirements and Compulsory Liability Insurance as Solutions to the Judgment-Proof Problem

43 Pages Posted: 23 Aug 2004  

Steven Shavell

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

Multiple version iconThere are 2 versions of this paper

Date Written: February 2004

Abstract

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.

JEL Classification: D00, K13, K20, L5

Suggested Citation

Shavell, Steven, Minimum Asset Requirements and Compulsory Liability Insurance as Solutions to the Judgment-Proof Problem (February 2004). Harvard Law and Economics Discussion Paper No. 456. Available at SSRN: https://ssrn.com/abstract=580721 or http://dx.doi.org/10.2139/ssrn.580721

Steven Shavell (Contact Author)

National Bureau of Economic Research (NBER)

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Harvard Law School ( email )

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