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Environmental risk and extended liability: The case of green technologies

Author

Listed:
  • Dionne, Georges

    (HEC Montreal, Canada Research Chair in Risk Management)

  • Spaeter, Sandrine

    (Université Louis Pasteur)

Abstract

We analyze the effect of extending environmental risk to banks. We assume that the firm needs external funds to invest in green technology and reduce the risk of environmental damage. Prevention may affect the distribution of both environmental losses and operating revenues. We show that, under moral hazard, the firm does not always invest less in prevention than the optimal social level. We also show that extending liability may improve both the level of prevention and the level of compensation. However, extended liability always leads to an increased probability of bankruptcy for the firm. We also obtain that partial extended liability improves social welfare, while full extended liability does not.

Suggested Citation

  • Dionne, Georges & Spaeter, Sandrine, 1998. "Environmental risk and extended liability: The case of green technologies," Working Papers 98-12, HEC Montreal, Canada Research Chair in Risk Management.
    • Handle: RePEc:ris:crcrmw:1998_012
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    References listed on IDEAS

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    1. Bruno Jullien & Georges Dionne & Bernard Caillaud, 2000. "Corporate insurance with optimal financial contracting," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 16(1), pages 77-105.
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    More about this item

    Keywords

    Environmental risk; limited liability; extended liability; investment in prevention; moral hazard;
    All these keywords.

    JEL classification:

    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
    • K32 - Law and Economics - - Other Substantive Areas of Law - - - Energy, Environmental, Health, and Safety Law

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