Liability Transfers: An Economic Assessment of Buyer and Lender Liability

This paper examines the conditions under which it is efficient to transfer liability for contamination of a given piece of property from the seller to the buyer at the time of sale and then, for debt-financed sales for which there is a foreclosure, subsequently to the lender who has financed the purchase. We identify two key potential sources of inefficiency, which depend on the relative probabilities that the parties will be judgment-proof at the time liability is imposed. The results suggest that the efficiency effects of liability transfers will depend on the relative magnitudes of these two sources of inefficiency.