The (Mixed) Effects of Minimum Asset Requirements When There is a Possibility of Technological Change

Abstract

Abstract Civil liability and ex ante authorizations are usually combined to regulate risks from high-risk industries. Authorizations may require firms to be sufficiently endowed with assets. Such a requirement is made in order to force sufficient risk internalization by firms, thus ensuring optimal decisions on risk control. But most studies on the incentives provided by asset requirements for controlling risks have been conducted in a context of a unique technology of production. When the firm has the possibility of adopting new and more cost-efficient technology, we show that tightening the minimum asset requirement can have a non-monotonic effect on the firm’s technological choice: increasing the firm’s level of assets can lead to a divergence of private and social interests as regards the technological choice. This feature can be observed both when the level of harm is dependent on, or independent of, the level of activity.