Optimal Successor Liability

Abstract

In case of a merger or an acquisition, a tort liability that arises from the seller's conduct is often imposed on the buyer through the doctrine of successor liability. If the buyer has as much information about the potential liability as the seller, the first best is achieved: all gains from acquisition are realized and the seller takes the efficient amount of precaution. However, when the seller has more information about the potential liability than the buyer, there could be too little acquisition, too little incentive on the seller, or both. The court can increase the successor liability to improve welfare. We show that imposing a higher damages against the surviving seller is better than increasing the liability against the buyerSuccessor Liability, Tort, Products Liability