Tracy R. Lewis and David E.M. Sappington INTRODUCTION The judgment-proof problem has long been recognized as one with serious practical implications, particularly in the areas of environmental protection and product safety. A judgment-proof problem arises when the total resources that a producer commands are small relative to the social damages that its activities may cause. The producer’s limited wealth makes it judgment-proof in the sense that it cannot be forced to compensate victims fully for the losses they suffer because of the producer’s activities. Consequently, the producer takes too little care to limit the social damages that can arise from its activities (for example, losses from environmental contamination or unsafe products).1 Numerous solutions to the judgment-proof problem have been proposed. One potential solution is to ban completely activities that may result in severe environmental damage. Another possible solution is to impose stringent government oversight and control on the activities in question. A third alternative, which relies less on government intervention and more on providing direct incentives to producers, is to increase the loss that a producer experiences when its activities result in social damages, even though the producer’s initial resources are limited. The purpose of this research is to propose a liability rule that serves exactly this purpose. Under the liability rule that we propose (called horizontal vicarious liability), all potential producers that wish to have the opportunity to engage in a risky activity are required to post a non-refundable bond with the government. The government subsequently selects a...
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