Working Paper BETA #2021-07

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Title : Efficiency of sharing liability rules: An experimental case

Author(s) : Serge Garcia, Julien Jacob, Eve-Angéline Lambert

Abstract : We experimentally investigate the relative performance of two liability sharing rules for managing environmental harms that are jointly caused by two firms which can make ex ante safety investments in order to reduce the magnitude of the harm. The investment levels are chosen non-cooperatively and assumed to be non-observable by the regulator. If one firm is unable to cover its part of the damages, third parties might not receive full compensation for their harm. Through an experiment, we analyze the investment choices under two widely used liability sharing rules and compare the decisions to theoretical predictions. In line with theory, we show that insolvency leads to under-investment. Moreover, we show that the relative performance of each rule depends on the firms’ relative degree of solvency. Our results indicate that the legislator should make the default liability sharing rule dependent upon the degree of capitalization of firms.

Key-words : Environmental Regulation; Liability Sharing Rules; Multiple Tortfeasors; Firms’ Insolvency

JEL Classification : K13 ; K32 ; Q53