1. ^aDepartment of Economics, Université de Montréal, C.P. 6128, succursale Centre-ville, Montreal QC, Canada H3C 3J7. E-mail: Marcel.Boyer@cirano.qc.ca
2. ^bFacoltà di Economia Ecotekne, Università di Lecce, Via per Monteroni, Lecce 73100, Italy. E-mail: d.porrini@economia.unile.it

We are grateful to anonymous referees and to the participants in the Joint Seminar of The Geneva Association and EALE (Lecce, June 2007) for their comments on a previous draft of this paper, as well as to participants in The Stony Brook Law and Economics Workshop (Long Island, July 2005) and in the 15th Annual Meeting of the American Law and Economics Association (New York, May 2005), whose suggestions led to the current paper. We remain of course solely responsible for the content and shortcomings of this paper.

Abstract

Using a structural model of the interactions between governments, firms and insurance companies, we characterize the distortions in environmental liability sharing between firms and insurance companies that the imperfect implementation of government policies implies. These distortions stem from three factors: the presence of moral hazard, the non-congruence between firms/insurers' objectives and social welfare, and the courts' imperfect assessment of safety care levels exerted by firms. We characterize cases where the efficient liability sharing factor is above or below its full information perfect implementation level. We derive comparative statics results indicating how sensitive the liability sharing factor is to changes in parameters (parameters that underlie the firm profit level and volatility, the cost of safety care, the monitoring cost, the social cost of public funds, the effectiveness of care in reducing the probability of accident) that are relevant for the characterization of optimal policies (liability sharing, safety care standards) toward environmental protection or the prevention of industrial accidents. We derive policy implications regarding environmental disaster insurance policies.