Working Paper BETA #2010-12

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

Author(s) : Julien Jacob, Sandrine Spaeter

Abstract : 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.

Key-words : Technological risk, limited liability, incentives, technical choice, taxes.

JEL Classification : D81, H23, K39, Q55.