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Liability and Organizational Choice

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  • Brooks, Richard R W

Abstract

Scholars have long maintained that increases in liability encourage firms to contract out risky activities in order to take advantage of so-called judgment-proof strategies. These strategies allow entities to limit their liability through contractual arrangements with nearly insolvent firms. However, the use of judgment-proof firms triggers countervailing effects: it provides opportunities to externalize liability through judgment-proof firms, but the insolvency of these firms introduces distortion in care levels that can generate more liability costs. These costs may outweigh the benefits of externalizing liability, making contracting out suboptimal. A simple model of organizational decision making with judgment-proof firms is developed and applied to the oil industry, where contracting out decreased in response to heightened liability following the Exxon Valdez oil spill. Copyright 2002 by the University of Chicago.

Suggested Citation

  • Brooks, Richard R W, 2002. "Liability and Organizational Choice," Journal of Law and Economics, University of Chicago Press, vol. 45(1), pages 91-125, April.
    • Handle: RePEc:ucp:jlawec:v:45:y:2002:i:1:p:91-125
    DOI: 10.1086/340386
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    References listed on IDEAS

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    Cited by:

    1. Yeon‐Koo Che & Kathryn E. Spier, 2008. "Strategic judgment proofing," RAND Journal of Economics, RAND Corporation, vol. 39(4), pages 926-948, December.
    2. Fu, Qiang & Gong, Jie & Png, I.P.L., 2018. "Law, social responsibility, and outsourcing," International Journal of Industrial Organization, Elsevier, vol. 57(C), pages 114-146.
    3. Juan José Ganuza & Fernando Gómez, 2008. "Realistic Standards: Optimal Negligence with Limited Liability," The Journal of Legal Studies, University of Chicago Press, vol. 37(2), pages 577-594, June.
    4. Iwasaki, Ichiro & 岩﨑, 一郎 & イワサキ, イチロウ, 2013. "Economics of Corporate Form: Why Do Russian Firms Prefer to Be Closed Companies?," RRC Working Paper Series 3, Russian Research Center, Institute of Economic Research, Hitotsubashi University.
    5. Julien Hay, 2010. "How efficient can international compensation regimes be in pollution prevention? A discussion of the case of marine oil spills," International Environmental Agreements: Politics, Law and Economics, Springer, vol. 10(1), pages 29-44, March.
    6. Robert Cooter & Hans Bernd Schäfer, 2011. "The Secret of Growth Is Financing Secrets: Corporate Law and Growth Economics," Journal of Law and Economics, University of Chicago Press, vol. 54(S4), pages 105-123.

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