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. Keywords: liability sharing, industrial/environmental liability, safety care, moral hazard,