Environmental risk and extended liability: The case of green technologies

We analyze the effect of extending environmental risk to banks. We assume that the firm needs external funds to invest in green technology and reduce the risk of environmental damage. Prevention may affect the distribution of both environmental losses and operating revenues. We show that, under moral hazard, the firm does not always invest less in prevention than the optimal social level. We also show that extending liability may improve both the level of prevention and the level of compensation. However, extended liability always leads to an increased probability of bankruptcy for the firm. We also obtain that partial extended liability improves social welfare, while full extended liability does not.