Judgment Proofness under Four Different Precaution Technologies

Abatement, Care, and Compliance by Firms in Financial Distress

“…While beyond the scope of our analysis, a potential extension of our work could consider a variant of our model in which precaution affects both the probability and magnitude of a liability. This would allow a comparison along the lines of Dari-Mattiacci and Geest (2005).…”

“…In the terminology ofDari-Mattiacci and Geest (2005), the model we employ is a "magnitude model" in that precaution affects only the magnitude, not the probability, of the liability. We focus on a magnitude model primarily because incentives are somewhat more transparent in this context than in a comparable "probability model," where precaution affects only the probability of a liability.…”

Judgment Proofness and the Choice between Monetary and Nonmonetary Care

“…If a less qualified, less trustworthy agent is hired, the principal will probably pay the agent less, but will have to exert greater effort in monitoring. Taking the observation that care is only very rarely unidimensional (see, e.g., Anderson, 2007;Dari-Mattiacci, 2005) as a starting point, we therefore seek to analyze settings in which the set of precautionary measures includes one with nonmonetary costs and one with monetary costs.…”

“…If care is monetary and strict liability is the applicable rule, injurers with asset levels less than but close to the level of harm exert more care than injurers whose asset constraint is not binding in the case of an accident. In light of this excessive monetary care, Dari-Mattiacci (2006) characterizes conditions under which the introduction of a liability cap can improve welfare. Boyd and Ingberman (1994) extend the basic premise of care analysis by considering the possibility that precaution might affect the loss magnitude rather than the accident probability, or that it might lower both.…”

“…Consequently, in this setting, actors with assets less than the harm incurred can be induced to take efficient care. Dari-Mattiacci andDe Geest (2005, 2006) build on these results, adding a fourth possibility: the separate-probability-magnitude model, in which two different precautions can be taken. In our analysis, we abide by the convention that care reduces the accident probability.…”