Bankruptcy and Torts

Abstract

This paper investigates the properties of various legal regimes when there is the opportunity for bankruptcy through debt. The key result is that, for a single tortfeasor, strict liability always yields less than the socially optimal level of care, while negligence will never do any worse than strict liability. When the magnitude of the liability is increased, the firm may increase care and leverage, increase care and decrease leverage, or decrease care and increase leverage. In the case of joint torts, when an increase in liability induces firms to increase their care, a joint and several negligence regime is unambiguously superior. If the converse is true, then joint and several negligence may still dominate, although joint and non-several negligence may be the better regime.

JEL Classification: G33, G32, K13