Bargaining power and the impact of lender liability for environmental damages

Balkenborg, D. (1997) Bargaining power and the impact of lender liability for environmental damages. Southampton, UK, University of Southampton (Discussion Papers in Economics and Econometrics 9709).


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Should lenders be made liable for environmental damages caused by their customers? In a recent paper Pitchford studied the case where the customer is a wealth-constrained manager-owned firm. He argued convincingly that a joint liability of lender and firm may reduce the firm's incentive to prevent an environmental damage and may therefore be socially harmful.

However, his argument hinges on the assumption that the lender has no bargaining power and makes 0-profits in a contract. In this paper we study all possible optimal contracts between the borrower and the lender. In particular we study the case where the lender has all the bargaining power. We use the weighted Nash-bargaining solution to handle both cases in a unified framework.

The results for the case where the lender has a high bargaining power differ substantially from Pitchford's findings. Then a joint liability rule is socially preferable to single liability of the firm. In fact, often it is optimal to require a liability above the actual costs of a damage or to set it so high that it extracts all potential profits from the project

Item Type: Monograph (Discussion Paper)
Related URLs:
Subjects: H Social Sciences > HG Finance
H Social Sciences > HD Industries. Land use. Labor > HD28 Management. Industrial Management
G Geography. Anthropology. Recreation > GE Environmental Sciences
Divisions : University Structure - Pre August 2011 > School of Social Sciences > Economics
ePrint ID: 33183
Accepted Date and Publication Date:
January 1997Made publicly available
Date Deposited: 25 Jan 2008
Last Modified: 31 Mar 2016 11:59

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