Modeling the Choice Between Regulation and Liability in Terms of Social Welfare

Using a formal political economy model with incomplete information regarding the accident preventing activities chosen by the firm (moral hazard) under limited liability, we illustrate different conditions under which an environmental protection system based on extending liability to private financiers or to insurers through compulsory full insurance of the firm is welfare superior, inferior or equivalent to a system based on an incentive regulatory scheme subject to capture by the regulatees. We consider explicitly the following factors: the differential cost between low and high levels of environmental protection activities and the associated accident probabilities, the social cost of public funds, the informational rent of the firm, the net profitability of the risky activities, the level of damages if an accident occurs, the bias factor in case of regulatory capture. We characterize in this parameter space the regions where one system dominates the other. À l aide d un modèle formel d économie politique avec information incomplète concernant les activités de prévention d accident choisies par l entreprise (risque moral) à responsabilité limitée, nous illustrons différentes conditions sous lesquelles un système de protection environnementale reposant sur la responsabilité élargie aux financiers privés et aux assureurs grâce à une assurance complète et obligatoire de la firme est supérieur, inférieur ou équivalent en terme de bien-être social à un système reposant sur un mécanisme de réglementation incitative sujet à la capture par les réglementés. Nous considérons explicitement les facteurs suivants : le coût différentiel entre les niveaux faibles et élevés d activités de protection de l'environnement et les probabilités d'accidents qui leur sont associées, le coût social des fonds publics, la rente informationnelle de l entreprise, la rentabilité nette des activités risquées, le niveau des dommages en cas d accident et le facteur de biais en cas de capture de l agence de réglementation. Nous caractérisons, dans cet espace de paramètres, les régions dans lesquelles un système domine l'autre.Environment, extended liability, CERCLA, capture, choice of instruments, Environnement, responsabilité élargie, CERCLA, capture, choix d'instruments

The Choice of Instruments for Environmental Policy: Liability or Regulation?

We address in this paper the problem of comparing and choosing among different policy instruments to implement the incentive objective of an efficient deterrence of environmental degradation and the remedy objective of an efficient clean-up of damages and a proper compensation of victims. Two main instruments are considered, namely the assignment of legal liability for environmental damage, such as in the American CERCLA and in the European White Paper, including extended liability provisions, and the design of an incentive regulation framework. Our results derive from a formal and structured analytical approach to modeling the economic interactions between different decision makers such as governments, firms, regulators and financiers. Dans cet article, nous comparons différents instruments visant une protection efficace contre la dégradation de l'environnement, une couverture efficace des dommages et une compensation convenable aux victimes. Nous considérons deux instruments principaux, à savoir un régime de réglementation incitative et un régime de responsabilité légale en cas de dommages environnementaux, tel qu'on le trouve dans le CERCLA américain et le White Paper européen qui comportent des provisions de responsabilité élargie. Nous développons une approche analytique structurée et formelle à la modélisation des interactions économiques entre les différents décideurs que sont les gouvernements, les entreprises, les régulateurs et les financiers.Environmental policy, extended liability, regulatory capture, instrument choice, Politique environnementale, responsabilité élargie, capture des régulateurs, choix d'instruments

Optimal liability sharing and court errors: an exploratory analysis

We focus in this paper on the effects of court errors on the optimal sharing of liability between firms and financiers, as an environmental policy instrument. Using a structural model of the interactions between firms, financial institutions, governments and courts we show, through numerical simulations, the distortions in liability sharing between firms and financiers that the imperfect implementation of government policies implies. We consider in particular the role played by the efficiency of the courts in avoiding Type I (finding an innocent firm guilty of inappropriate care) and Type II (finding a guilty firm innocent of inappropriate care) errors. This role is considered in a context where liability sharing is already distorted (when compared with first best values) due not only to the courts' own imperfect assessment of safety care levels exerted by firm but also to the presence of moral hazard and adverse selection in financial contracting, as well as of noncongruence of objectives between firms and financiers on the one hand and social welfare maximization on the other. Our results indicate that an increase in the efficiency of the court system in avoiding errors raises safety care levels, thereby reducing the probability of accident, and allowing the social welfare maximizing government to impose a lower liability [higher] share for firms [financiers] as well as a lower standard level of care.Environmental Policy, Court Efficiency, Liability Sharing, Regulation, Incomplete Information.

Sharing Liability Between Banks and Firms: The Case of Industrial Safety Risk

We characterize the distortions in environmental liability sharing between firms and banks that the imperfect implementation of government policies implies. These distortions stem from three factors: the presence of moral hazard, the use of objective functions by firms and banks that differs from the social welfare function, and the difficulty for the court to assess the safety care level exerted by the firms. We characterize cases where the liability sharing factor is above or below its full information perfect implementation level. We derive comparative statics results indicating the sensitivity of the liability sharing factor to changes in some parameters relevant for characterizing the optimal policy toward environmental protection or the prevention of industrial accidents. Nous caractérisons les distortions dans le partage de responsabilités entre banques et firmes qu'implique l'implémentation imparfaite des politiques gouvernementales. Ces distortions découlent de la présence de risque moral et de sélection adverse, de l'utilisation de fonctions-objectifs par les firmes et les banques diffèrentes de la fonction de bien-être social, et de la difficulté des cours de justice d'évaluer le niveau de précaution exercé par les firmes. Nous montrons l'existence de divers cas où le partage de responsabilités est supérieur ou inférieur au partage optimal en information et implémentation parfaites. Nous obtenons des résultats de statique comparée illustrant la sensibilité du partage des responsabilités aux paramètres pertinents à la détermination d'une politique optimale de protection environnementale ou de prévention d'accidents industriels.liability sharing, industrial/environmental liability, safety care, moral hazard, principal-agent, partage de responsabilités, environnement, prévention, risque moral, sélection adverse, principal-agent

Optimal Liability Sharing and Court Errors: An Exploratory Analysis

We focus in this paper on the effects of court errors on the optimal sharing of liability between firms and financiers, as an environmental policy instrument. Using a structural model of the interactions between firms, financial institutions, governments and courts we show, through numerical simulations, the distortions in liability sharing between firms and financiers that the imperfect implementation of government policies implies. We consider in particular the role played by the efficiency of the courts in avoiding Type I (finding an innocent firm guilty of inappropriate care) and Type II (finding a guilty firm innocent of inappropriate care) errors. This role is considered in a context where liability sharing is already distorted (when compared with first best values) due not only to the courts’ own imperfect assessment of safety care levels exerted by firm but also to the presence of moral hazard and adverse selection in financial contracting, as well as of non-congruence of objectives between firms and financiers on the one hand and social welfare maximization on the other. Our results indicate that an increase in the efficiency of the court system in avoiding errors raises safety care levels, thereby reducing the probability of accident, and allowing the social welfare maximizing government to impose a lower liability [higher] share for firms [financiers] as well as a lower standard level of care.environmental policy, court efficiency, liability sharing, regulation, incomplete information

The Efficient Liability Sharing Factor For Environmental Disasters: Lessons For Optimal Insurance Regulation

Using a structural model of the interactions between governments, firms and insurance companies, we characterise the distortions in environmental liability sharing between firms and insurance companies that the imperfect implementation of government policies implies. These distortions stem from three factors: the presence of moral hazard, the non congruence between firms/insurers objectives and social welfare, and the courts’ imperfect assessment of safety care levels exerted by firms. We characterize cases where the efficient liability sharing factor is above or below its full information perfect implementation level. We derive comparative statics results indicating how sensitive the liability sharing factor is to changes in parameters (parameters that underlie the firm profit level and volatility, the cost of safety care, the monitoring cost, the social cost of public funds, the effectiveness of care in reducing the probability of accident) that are relevant for the characterization of optimal policies (liability sharing, safety care standards) toward environmental protection or the prevention of industrial accidents. We derive policy implications regarding environmental disaster insurance policies. À l’aide d’un modèle structurel des interactions entre les gouvernements, les entreprises et les assureurs, nous caractérisons les distorsions dans le partage des responsabilités entre entreprises et assureurs qu’implique la mise en place imparfaite des politiques gouvernementales. Ces distorsions résultent de trois facteurs : la présence de risque moral, la non-congruence des objectifs des entreprises, des assureurs et de bien-être social, et l’observation imparfaite des efforts de prévention des entreprises par le système judiciaire. Nous dérivons des résultats de statique comparée montrant la sensibilité du facteur de partage des responsabilités à des changements dans les paramètres sous-jacents à la profitabilité, au coût des efforts de prévention, à l’efficacité de ces efforts dans la réduction de la probabilité d’accident, au coût de monitoring, au coût social des fonds publics, et qui sont pertinents à la caractérisation des politiques optimales (partage de responsabilité, standard légal du niveau de prévention) de protection environnementale et de prévention des accidents. Nous en déduisons certaines implications quant aux politiques relatives à l’assurance contre les désastres environnementaux.Liability sharing, environmental insurance, safety care, moral hazard, principal-agent., Partage de responsabilité, assurance environnementale, effort de prévention, risque moral, principal-agent.

The Choice between Economic Policies to Face Greenhouse Consequences

In the past few years, unstable and extreme weather patterns are increasingly occurring as phenomena of climate change and the link to greenhouse gas emissions, we can say, is scientifically accepted. Extreme weather patterns are causing major damage on health, property and business and the question is becoming who is going to pay. In this paper, the problem is analyzed starting from the consideration that emitters of greenhouse gases externalize the true costs of their contribution to climate change. The comparison of alternative regulatory systems in the environmental field, following an economic analysis of law (EAL) approach, lies on the assumption that people act rationally and respond to incentives, as stated by the price theory. Traditionally regulatory systems originates from the presence of market failure: in our specific case, the environment appears as a "public good" that may not be appropriated and has no market price; the damage to the environment is a case of "externality", in that it is fully or partly a social cost that is not internalized into the accounts of the parties causing it. In the EAL literature, environmental regulation has been seen as it may play a role in correcting malfunction and subsequent inefficiencies. Particularly, regulation systems intervene ex ante or ex post on the behavior of (potential) injurers that (can) cause an environmental accident with a consequent environmental damage. Efforts to recover these costs, which manifest both through the costs of impacts and the costs of efforts to prevent impacts, could imply a relevant role for the insurance sector. Because the insurance sector is the world's largest industry, the response of insurers to the broader climate-change challenge will no doubt be key to solve this internalization problem. The first part of the paper aims to provide an overview of the literature within the traditional EAL approach about the comparison between different environmental systems, first of all ex ante regulatory system, such as command-and-control policies; secondly, ex post regulatory system, such as a civil liability system, having in mind their application within United States and European Community. Particularly the contributions of the EAL literature will be analyzed considering how the authors increasingly try to describe the two regulatory systems including imperfections, such as the uncertainty in the implementation of the liability system. Then, the paper discusses the role that insurance sector can play in the design of political economic solutions for climate change consequences. In this sense, the role of the insurance sector can be in different directions: first of all, the supply of insurance coverage for claims of third-parties who allege injury or property damage; secondly, the design of insurance financial products aim to finance technological responses to climate-change (mitigation and adaptation strategy). Specifically the paper will address the issue of the indirect effects of the insurers, in proactively stimulating climate change prevention behavior related to their customers in the view of the choice of political economic instruments. Finally the paper will take into account the new policies on this field that, at the end of this year, the COP-21 conference in Paris will consider in a new International Protocol

Regolazione ex ante, regolazione ex post e auto-regolazione: il caso ambientale

In this paper, a theoretical analysis of the choice of self-regulating is presented in relation to the ex ante and ex post forms of regulation. First of all the relation of complementarity between these last forms of regulation is investigated through some contributions in the law and economic literature. Then the difficulties of defining the level of care is considered in relation with the presence of asymmetric information problem trying to point out how the self-regulation choice depends on the imperfections in the definition of the care level of the other instruments of regulation. Finally the imperfections characterising the ex ante and ex post regulation systems will be analysed as generating the choice of self-regulation having a look to the US and EC experience of application in the environmental field. JEL K13, K32, L51, Q28

Class action and financial markets: Insights from law and economics

According to the law and economics approach, pure economic loss is a private loss that is not socially relevant but simply implies a redistribution of wealth. Consequently, wrongful behavior that induces reallocation of costs and benefits with no consequences on social welfare is not considered socially harmful, so is not necessarily subject to compensation. Since pure economic loss is very often financial, the above reasoning also applies to financial markets. However, the same law and economics arguments suggest that in financial markets, the policy of internalizing pure economic loss by means of class actions can be more far-sighted than simply compensating the victims: the liability system has the particular feature of producing deterrence and driving the market towards an efficient outcome. In this vein, the paper argues that class action intended as a complementary ex-post regulatory device can play a significant role in addressing a failure that ex-ante regulation has not. This is coherent with the law and economics tradition that interprets tort law remedies as a solution for internalizing externality and providing the correct incentive to the markets.class action, pure economic loss, regulation, liability, deterrence

Competition in Banking: Switching Costs and the Limits of Antitrust Enforcement

The antitrust intervention in banking has always been heavily influenced by considerations of stability. Regulation has historically given precedence to the stability objective, relegating thus competition to second place. In fact, in the case of banking, price competition tends to encourage overly speculative behaviours, which essentially entail acceptance of excessive risk, with a resultant volatility that could potentially harm depositors, and ultimately compromise the stability of the economic system as a whole. The consequence of this approach is that banking market becomes extremely rigid on the supply side and structurally not equipped for a competitive orientation, and banks come to occupy a privileged position vis-à-vis governments that--to a greater or lesser extent, depending on the countries and the situations--enables them to sidestep the antitrust authorities. In such a scenario, the trade-off between stability and competition cannot be totally resolved through traditional antitrust actions, which are sometimes at odds with the stability objective and hampered by the constraints of the previously defined regulatory framework. It is precisely these considerations, found in a significant portion of the literature, that provide the starting base for the hypothesis of this work and namely the proposal of a novel demand side perspective, i.e. one which focuses on the central role of consumers in the competitive process. If intervention on the supply side is hampered a priori by the regulatory framework, it is nevertheless possible to implement pro-competition actions on the demand side, for example by enhancing the ability of consumers to change from one provider to the other without impacting on the market structure. In operational terms, the proposed approach is to leverage consumer mobility in order to stimulate the currently weakened competition between firms. This would make it possible to pursue the traditional antitrust objectives of efficiency and welfare maximisation, without necessarily impacting on stability.