2010 Volume 3 Issue 1 Pages 68-78
In many countries, firms are forced to maintain financial security in order to establish their financial responsibility for environmental risks. Almost all the papers on financial security have used models based on Shavell’s model for analyses of the judgment proof problem. This model is unique in showing the continuous change of firms’ care in relation to firms’ assets. Furthermore, some studies note that risk monitoring can lead firms to optimal care regardless of the expensive cost of risk monitoring. Using a different model from Shavell’s that shows the change of firms’ care having a discontinuity in firms’ assets, this article analyzes the environmental risk control function of obligatory financial security with fixed premium not depending on risk monitoring under imperfect information. The result shows that there is a chance that financial security can control environmental risks properly even if risk monitoring is not executed.
