Working Paper: NBER ID: w9335
Authors: Steven Shavell
Abstract: Requirements that parties have assets of at least a minimum level in order to participate in an activity are frequently imposed. A principal rationale for minimum asset requirements is considered in this article potential injurers have stronger incentives to prevent harm, or not to engage in harmful activities, provided that they have at least the required level of assets at stake if they are sued for causing harm. The optimal minimum asset requirement generally reflects a tradeoff between this advantage and the disadvantage that some parties with assets below a required level ought to engage in the activity (because the benefits they would obtain exceed the expected harm they would cause). Additionally, it is emphasized that minimum asset requirements are socially desirable only when the victims of harm are not customers of firms. When victims of harm are customers of firms, minimum asset requirements are socially undesirable.
Keywords: No keywords provided
JEL Codes: G28; K13; K20; L51
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| higher asset levels (G32) | improved behavior in terms of care exercised (I12) |
| insufficient assets (G33) | inadequate care (I14) |
| minimum asset requirements (G32) | reduced harmful activity (Q52) |
| minimum asset requirements (G32) | enhanced overall social welfare (D69) |
| imposing minimum asset requirements (G32) | preventing efficient firms with low assets from participating in beneficial activities (D22) |
| minimum asset requirements (G32) | trade-off of reduced harm vs. restricting beneficial production (Q52) |