Previous articleNext article No AccessAdverse Selection and Long-Term Hazards: The Choice between Contract and Mandatory Liability RulesSteven N. Wiggins, and Al H. RinglebSteven N. Wiggins Search for more articles by this author , and Al H. Ringleb Search for more articles by this author PDFPDF PLUS Add to favoritesDownload CitationTrack CitationsPermissionsReprints Share onFacebookTwitterLinkedInRedditEmail SectionsMoreDetailsFiguresReferencesCited by The Journal of Legal Studies Volume 21, Number 1Jan., 1992 Sponsored by The University of Chicago Law School Article DOIhttps://doi.org/10.1086/467904 Views: 5Total views on this site Citations: 13Citations are reported from Crossref Copyright 1992 The University of ChicagoPDF download Crossref reports the following articles citing this article:Julien Jacob Prévention ou innovation ? Vers une nouvelle définition de la gestion publique des risques technologiques, Revue d'économie politique Vol. 126, no.44 (Aug 2016): 499–534.https://doi.org/10.3917/redp.264.0499Florian Baumann, Tim Friehe Competitive Pressure and Corporate Crime, The B.E. Journal of Economic Analysis & Policy 16, no.22 (Apr 2016): 647–687.https://doi.org/10.1515/bejeap-2015-0064Matthew A. Cole, Robert J. R. Elliott, Joanne K. Lindley Dirty money: Is there a wage premium for working in a pollution intensive industry?, Journal of Risk and Uncertainty 39, no.22 (Aug 2009): 161–180.https://doi.org/10.1007/s11166-009-9077-xKlaas van ’t Veld Hazardous-industry restructuring to avoid liability for accidents, International Review of Law and Economics 26, no.33 (Sep 2006): 297–322.https://doi.org/10.1016/j.irle.2006.11.003Elizabeth Klee, Lewis A. Kornhauser Comparisons of the Incentive for Insolvency under Different Legal Regimes, SSRN Electronic Journal (Jan 2006).https://doi.org/10.2139/ssrn.880109Robin Mason Dividends, safety and liquidation when liabilities are long-term and stochastic, European Economic Review 48, no.66 (Dec 2004): 1179–1210.https://doi.org/10.1016/j.euroecorev.2004.03.006Lewis A. Kornhauser, Richard L. Revesz Regulation of Hazardous Wastes, (Jan 2017): 1638–1642.https://doi.org/10.1007/978-1-349-74173-1_311Scott E. Harrington, Patricia M. Danzon The Economics of Liability Insurance, (Jan 2000): 277–313.https://doi.org/10.1007/978-94-010-0642-2_9A.Todd Merolla The Effect of Latent Hazards on Firm Exit in Manufacturing Industries, International Review of Law and Economics 18, no.11 (Mar 1998): 13–24.https://doi.org/10.1016/S0144-8188(97)00054-9Peter Newman R, (Jan 1998): 205–394.https://doi.org/10.1007/978-1-349-14286-6_3Robin Mason Options for the Regulation of the Long-Term Environmental Impact of Chemicals in the European Union, (Jan 1998): 139–156.https://doi.org/10.1007/978-94-011-5316-4_9Al H. Ringleb, Steven L. Wiggins, John C. Morrison Institutional Control and Large-scale, Long-term Hazards, (Jan 1993): 1–19.https://doi.org/10.1007/978-94-011-2184-2_1Timothy Swanson, Robin Mason Monitoring for latent liabilities: When is it necessary and who should do it?, (): 387–411.https://doi.org/10.1016/S0193-5895(02)20019-6

Organizations face an increasingly litigious environment. We examined responses to one class of legal threats: liability stemming from employees' on-the-job exposure to hazardous materials. We empirically investigated the impact of such exposure on the vertical integration of firms and on the percentage change in the number of small firms in an industry. In the face of legal exposure, firms are more likely to adopt a nonvertically integrated production system, and small firm production in an industry increases. These actions reduce the liability of large firms. Incentives for small firms to produce in this context are also discussed.

This paper analyzes the application of liability to large-scale, long-term hazards. The key features distinguishing such hazards are the long temporal separation between exposure to a hazard and disease and the large damages when injuries finally emerge. The large scale of damages creates a strong incentive to avoid liability payments, and the long temporal separation creates numerous avenues through which parties can avoid paying possible damage awards. The analysis focuses on the incentive to avoid paying damages by vertically divesting production tasks associated with serious occupational risks. Such divestiture can lower liability costs if the small firm operating the risky stage goes out of business before latent injuries emerge or has insufficient assets to pay damages and declares bankruptcy when suits are filed. The paper then presents an empirical regression analysis of small-firm entry into the U.S. economy between 1967 and 1980, the period in which liability laws were changing. The point estimate is that, ceteris paribus, liability changes appear to have led to a large increase in small corporations in hazardous sectors. Hence the empirical analysis shows widespread attempts to avoid liability by shielding assets through divestiture.