Comparisons of the Incentive for Insolvency under Different Legal Regimes

26 Pages Posted: 5 Feb 2006  

Elizabeth Klee

Board of Governors of the Federal Reserve System

Lewis A. Kornhauser

New York University School of Law; New York University School of Law

Date Written: March 2006

Abstract

This paper compares, in the context of hazardous waste generation, the effects of joint and several liability on capital and production decisions to the effects of several only liability. Our main result shows that increased potential liability causes firms to decrease asset exposure, but may also lead firms to create less waste. First, we find that both several only and joint and several liability induce firms to go bankrupt more often and create more waste than is socially optimal. Then we find that, for a given level of funds, joint and several liability induces firms to go bankrupt more often and create more waste than several only liability. This implies that society will be responsible for a larger share of cleanup under joint and several liability than under several only liability. Finally, we show that firms with potentially higher liabilities for cleanup will raise less funds, creating smaller firms, and thus, the possibility of less waste generated overall.

Keywords: Joint and several liability, insolvency, torts, hazardous waste regulation, law and economics

JEL Classification: K13, K32, L29, Q53

Suggested Citation

Klee, Elizabeth and Kornhauser, Lewis A., Comparisons of the Incentive for Insolvency under Different Legal Regimes (March 2006). NYU, Law and Economics Research Paper No. 06-10. Available at SSRN: https://ssrn.com/abstract=880109 or http://dx.doi.org/10.2139/ssrn.880109

Elizabeth Klee (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th and Constitution Ave NW
Washington, DC 20551
United States

Lewis A. Kornhauser

New York University School of Law ( email )

40 Washington Square South
New York, NY 10012-1099
United States
(212) 998-6175 (Phone)
(212) 995-4341 (Fax)

New York University School of Law ( email )

40 Washington Square South
New York, NY 10012-1099
United States
(212) 998-6175 (Phone)
(212) 995-4341 (Fax)

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