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

Sandrine Spaeter, BETA, University of Strasbourg

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, first 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. Second, we show that an appropriate tax policy relative to the technological choice made by the firms increases the number of firms that make technological change under a limited liability rule. This technological change is welfare improving and it leads, under fair conditions, to full risk internalization despite the limited liability rule. Our normative results provide some arguments in favor of this rule, often considered as the main explanation of partial large-scale risk internalization by firms.
Keywords: Technological risk; limited liability; incentives; technical choice; taxes.
JEL Classification: D81, H23, K39, Q55.

About the speaker
Sandrine Spaeter is professor of economics at the University of Strasbourg and researcher at BETA. Her research topics come within the scope of risk and insurance microeconomics and decision theory. Applied research concerns nuclear risk, water pollution, oil spills, and more generally, the management of large-scale risks. Her main articles were published in the Journal of Public Economics, Economic Theory, Journal of Environmental Economics and Management, Geneva Papers on Risk and Insurance Theory, the International Journal of Global Energy issues, etc.

Venue: UNU-MERIT Conference Room

Date: 03 March 2011

Time: 12:30 - 13:30  CEST