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Abstract
This body of research is composed of three papers related to critical environmental issues that challenge contemporary society. The first paper considers the impact of extending a lender's liability for environmental damage caused by her borrower in a bilateral moral hazard setting where the lender's actions can influence the distribution of damage realizations. When the firm's asset base is limited relative to the highest possible damage realization, a shift towards greater leverage and more precautionary care is indicated. Extended liability diminishes the firm's solvency prospects.
The second paper examines the implication of alternative ex-post liability rules designed to deal with project failure for the nature of contractual arrangements between a foreign investor and a recipient (host) of an energy saving technology. Employing the methods of mechanism design, it is shown that installing liability on the host (she directly controls the failure risk) induces more effort distortion than assigning liability to the investor. Intuitively, installing sanctions on the host diminishes the moral hazard problem, but simultaneously intensify the adverse selection aspects of the agency problem, thereby, increasing the cost of using high-powered incentive schemes.
The third paper refines the second paper by (a) explicitly allowing the foreign investor to have some input into the technology transfer process, and (b) admitting the possibility of private knowledge of wealth on the part of the host. When the investor is held strictly liable, the optimal contract indicates a shift towards more effort by the investor. On the other hand, when the liability is installed on the host, the rent-efficiency trade off arising yields an incentive to overburden the host with too much investment. And the tendency to overburden the host is more significant the higher the host's wealth endowment.
