TY  - JOUR
ID  - publications19346
UR  - http://tse-fr.eu/pub/30053
IS  - 3
A1  - Feess, Eberhard
A1  - Hege, Ulrich
Y1  - 2003///
N2  - We compare different modes of extending liability to third parties motivated by the problem that firms may exert too little preventive care if damages are likely to exceed their equity. In our model, moral hazard about the choice of care that can be mitigated through stochastic monitoring, we show that the optimal allocation can always be implemented by a liability regime of full “financial responsibility,” that is mandatory liability coverage for total harm that can be fulfilled either by, an insurer or by a lender. All other liability regimes are shown to lead to distortions in the capital and debt structure. The difference between our results and related models finding liability below the level of harm to be optimal is explained by our treatment of safety monitoring and of optimal monitoring-dependent insurance contracts. The mechanism is robust vis-a-vis the introduction of risk aversion, provided that optimal wealth transfer are taken into account.
PB  - Elsevier
JF  - International Review of Law and Economics
VL  - 23
SN  - 0144-8188
TI  - Safety Monitoring, Capital Structure and Financial Responsibility
SP  - 323
AV  - public
EP  - 339
ER  -