Large-scale risks and technological change: What about limited liability?

We consider a firm that has to choose a technology to produce a given good. This technology drives a multiplicative large-scale risk of incident for Society: the total potential level of damage increases with the level of activity. Contrary to what is often argued in the literature, we show that limited liability can be more incentive for technical change than an unlimited liability rule, depending on the magnitude of the technological change and on the firm's size. In a second part of the paper, taxes are introduced. We show how manipulating the tax rate with respect to the technological choice made by the firm still enlarges the set of parameters that lead to technological change under a limited liability rule. Our normative results provide some arguments in favor of the limited liability rule, often considered as the main explanation of partial large-scale risk internalization by firms.Technological risk, limited liability, incentives, technical choice, taxes.

Insurance and Financial Hedging of Oil Pollution Risks

The current international regime that regulates maritime oil transport calls for financial contributions by oil firms once an oil spill has occurred. Their percentage contribution to the International Oil Pollution Compensation Fund depends only on their level of activity. In this paper, we show that this compensation regime would be more efficient if contributing oil companies adopted financial strategies to hedge against oil pollution risks. The optimal coverage contract is such that standard insurance is useful to manage small and medium oil spills, while investments on financial markets help to cover large oil spills, less frequent but much more catastrophic for society. We also show that the prevention of oil spills increases when insurance is combined with a financial hedging strategy. This positive effect on prevention is further enhanced if firms have the opportunity to send signals about their risk-reducing activities to potential investors.Oil spill, legislation, insurance, capital markets, prevention, catastrophe.

Adverse Selection, Emission Permits and Optimal Price Differentiation.

In this paper, we focus on the adverse selection issue that prevails in an economy when the regulator is not able to observe the type of the abate- ment costs of the firms. The regulator decides the total level of emission that minimizes the total social cost and he sells them to the firms at some di¤erentiated prices. When firms can hide their type relative to their true abatement costs, prices must not only minimize the social cost of the envir- onmental policy. They must also induce the firms to reveal their true type. A striking point of our model is that there is no participation constraint for firms are compelled to be actors of the environmental policy. Another original result concerns the rent, which still benefits to low-cost types, but which appears to be a fee paid by high-cost types.Regulation; adverse selection; emission permits; abatement costs; price differentiation.

Improving the Prevention of Environmental Risks with Convertible Bonds

In this paper, a manager borrows external funds in order to invest in production and also in prevention. The latter action must reduce the environmental risk driven by the activity of the firm. Prevention is observable neither by outside lenders nor by institutions such as environmental agencies for instance. In such a situation, we show that issuing convertible bonds - which permits the holder to exchange his bonds for a predetermined number of shares of the firm - from a limited liability firm could be a way to improve prevention compared to what can usually be done with standard debt. Such a relationship between the firm and the bank might be an alternative, or a complement, to the CERCLA legislation about extended liability which prevails in the United States and which is often discussed in Europe as a possible support of a more tightened European environmental legislation. We obtain an optimal convertible bond contract that induces more prevention and higher expected net revenues for the firm than standard debt. The expected social welfare is also improved. Finally, the economic implications of our findings are discussed.Moral Hazard, Environmental Risk, Limited Liability, Prevention, Convertible Bond.

The impact of ambiguity on health prevention and insurance.

In this paper, we analyze the choice of primary prevention made by individuals who bear a risk of being in bad health and an additive risk (of complications) that occurs after a disease has been diagnosed. By considering a two argument utility (depending on wealth and health), we show that the presence of a well-known (no ambiguity) additive risk of complications induces more investment in primary prevention by a risk-averse agent only if her preferences does not display some cross prudence in wealth (u122 0). We also show that full (partial) insurance can be optimal even if insurance premia are loaded (fair). These results hold with and without prevention and the individuals attitudes toward correlation help explain the impact of ambiguity on the optimal individual decisions.health; utility; ambiguity; prevention; insurance.

Misreporting, Retroactive Audit and Redistribution

In this paper, we investigate an audit policy that allows a regulator to control past declarations of an agent who is caught to fraud in the current period or to adopt an action that is not desirable for Society. Coupled with redistribution effects due to the production of a public good, we show that retroactivity has not always the desired effect on the level of evasion or the level of effort, once the agent has decided to deviate from a given objective. Nevertheless, we derive conditions under which retroactivity lessens fraudulent behaviors, in quantity and in value. As a related result, authorities should communicate about how they use the individual contributions but information should not be completely transparent in order to fight efficiently against deviation. Redistribution and retroactivity may have opposite effects on the behavior of the agent when combined together.

Misreporting, retroactive audit and redistribution.

In this paper, we investigate an audit policy that allows a regulator to control past declarations of an agent who is caught to fraud in the current period or to adopt an action that is not desirable for Society. Coupled with redistribution effects due to the production of a public good, we show that retroactivity has not always the desired effect on the level of evasion or the level of effort, once the agent has decided to deviate from a given objective. Nevertheless, we derive conditions under which retroactivity lessens fraudulent behaviors, in quantity and in value. As a related result, authorities should communicate about how they use the individual contributions but information should not be completely transparent in order to fight efficiently against deviation. Redistribution and retroactivity may have opposite effects on the behavior of the agent when combined together.moral hazard, retroactive audit, redistribution, public good, fraud.

Reversibility and switching options values in the geological disposal of radioactive waste.

This article offers some economic insights for the debate on the reversible geological disposal of radioactive waste. Irreversibility due to large sunk costs, an important degree of flexibility and several sources of uncertainty are taken into account in the decision process relative to the radioactive waste disposal. We draw up a stochastic model in a continuous time framework to study the decision problem of a reversible repository project for the radioactive waste, with multiple disposal stages. We consider that the value of reversibility, related to the radioactive waste packages, is jointly affected by economic and technological uncertainty. These uncertainties are modeled, first, by a 2-Dimensional Geometric Brown- ian Motion, and, second, by a Geometric Brownian Motion with a Poisson jump process. A numerical analysis and a sensitivity study of various parameters are also proposed.radioactive waste, reversibility, switching, real option theory.

Principe de precaution et comportements preventifs des firmes face aux risques environnementaux

Prévention et précaution sont deux concepts bien différents, même si le premier peut être considéré comme un cas particulier du second lorsqu'aucune nouvelle information ne doit arriver dans le futur. Néanmoins, les deux concepts se rejoignent lorsqu'il s'agit d'envisager les problèmes que peuvent poser la mise en oeuvre de mesures préventives au sein d'entreprises dont les activités présentent un risque pour l'environnement. Dans cet article, nous proposons une analyse de l'impact de la législation environnemntale américaine sur les comportements des entreprises, des assureurs et des banques. Nous considérons ensuite le cas européen. Il est notamment important de se demander si l'exemple américain est à suivre dans l'extension de la responsabilité en cas de sinistre environnemental aux banques prêteuses par exemple. Nous discutons également les résultats de la théorie économique, qui doivent permettre d'étayer l'analyse et de mettre en évidence les avantages et inconvénients de ce qu'on appellera la responsabilité étendue.risque environnemental, legislation, prevention, responsabilite limitee, information privee.

Prevention and Compensation of Muddy Flows: Some Economic Insights.

Recent surveys report the increasing number of muddy flows in many areas, and point out the fact that agricultural practices (among others) influence significantly the risk and severity of muddy flows. In this paper, we investigate the economic incentives that can be given to the farmer to adopt different practices. We propose an original economic instrument that entails an `ambient tax', voluntary revelations and a compensation fund. Because of the authorities' difficulties to be informed of each farmer's individual efforts, the tax cannot depend on the individual but on the collective level of efforts. However, each agent may lower his tax payment by revealing his individual efforts to the regulator so that high efforts may be rewarded compared to low ones. The tax revenue is used to supply a fund that is dedicated to the compensation of victims if a muddy flow occurs. hence it is possible to simultaneously increase the incentives for farmers to adopt more environmentally friendly practices and to improve the compensation of victims without mitigating their incentives to protect themselves against the risk of muddy flow.muddy flow, natural disasters, economic incentives, ambient tax, insurance, compensation fund.