期刊名称：Discussion Paper Series / Department of Economics, New York University
出版年度：2006
卷号：1
出版社：New York University
摘要：A liquidity-constrained entrepreneur needs to raise capital to finance
a business activity that may cause injuries to third parties — the tort
victims. Taking the level of borrowing as fixed, the entrepreneur finances the
activity with senior (secured) debt in order to shield assets from the tort victims
in bankruptcy. Interestingly, senior debt serves the interests of society
more broadly: it creates better incentives for the entrepreneur to take precautions
than either junior debt or outside equity. Unfortunately, the entrepreneur
will raise a socially excessive amount of senior debt, reducing his incentives for
care and generating wasteful spending. Giving tort victims priority over senior
debtholders in bankruptcy prevents over-leveraging but leads to suboptimal incentives.
Lender liability exacerbates the incentive problem even further. A
Limited Seniority Rule, where the firm may issue senior debt up to an exogenous
limit after which any further borrowing is treated as junior to the tort
claim, dominates these alternatives. Shareholder liability, mandatory liability
insurance and punitive damages are also discussed.
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