Journal of Finance and Economics

Journal of Finance and Economics

ISSN: 2291-4951 (Print)    ISSN: 2291-496X (Online)

Volume 4 (2016), No. 1, Pages 1-23

DOI: 10.12735/jfe.v4i1p01

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Financial Assurance versus Liability as Solutions to the Judgment-Proof Problem

Joshua Okeyo Anyangah1 

1Faculty of Business, Athabasca University, Alberta, Canada


To Cite this Article     Article Views: 991     Downloads: 631  Since deposited on 2016-01-21


A firm is said to be judgment-proof if it can cause an accident and then skirt its environmental liabilities by pleading bankruptcy. Judgment-proofness is a public-policy problem because it saddles society with uncompensated liability and stifles the firm’s incentive to undertake due care. We employ a simple lending model that incorporates moral hazard to compare three instruments designed to remedy the judgment-proof problem; namely, environmental bonds, mandatory liability insurance and liability. Incentives are unambiguously stronger under liability than they are under either bonds or mandatory insurance. Credit is more rationed and the span of potentially damaging projects is lower under bonds and mandatory insurance than they are under liability. The relative impact of these instruments on social welfare ambiguously depends on entrepreneurial wealth.

JEL Classifications: K13, K32, D82, Q58

Keywords: financial assurance, extended liability, liability, judgment-proof problem

To Cite this Article: Anyangah, J. O. (2016). Financial assurance versus liability as solutions to the judgment-proof problem. Journal of Finance and Economics, 4(1), 1-23.

Copyright © Joshua Okeyo Anyangah

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This article is published under license to Science and Education Centre of North America. This is an Open Access article distributed under the terms of the Creative Commons Attribution 4.0 International License.

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Financial Assurance versus Liability as Solutions to the Judgment-Proof Problem