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Comparisons of the Incentive for Insolvency under Different Legal Regimes

By Lewis A Kornhauser and Elizabeth Klee


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 \u22smaller\u22 firms, and thus, the possibility of less waste generated overall

Topics: Law and Economics, Law and Economics
Publisher: NELLCO Legal Scholarship Repository
Year: 2006
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