American Law and Economics Review Advance Access published online on October 22, 2007
American Law and Economics Review, doi:10.1093/aler/ahm013
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Successor Liability and Asymmetric Information
University of Virginia
Send correspondence to: Albert H. Choi, School of Law, University of Virginia, 580 Massie Road, Charlottesville, VA 22903-1789, USA; Phone: (434) 924-4709; E-mail: ahc4p{at}virginia.edu
JEL: K13, K22, K32
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Abstract |
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The doctrine of successor liability transfers tort liability arising from the seller's past conduct from the seller to the buyer. If the buyer has as much information about the liability as the seller, all beneficial acquisitions take place and the seller takes the efficient level of precaution. However, if the seller has more information about the liability than the buyer, not all beneficial acquisitions are consummated and the seller takes a suboptimal level of precaution. I argue that, in the presence of information asymmetry, the courts should increase the damages against the (potential) seller to provide better incentives to take precaution while decreasing the damages against the buyer to encourage more beneficial asset sales.
I would like to thank Paul Mahoney, Steven Shavell, and George Triantis for many helpful comments and suggestions. I would also like to thank the workshop participants at Duke, Georgetown, Northwestern, University of Chicago, University of Toronto, University of Virginia, and Yale law schools, and conference participants at the 2006 American Law and Economics Association Annual Meeting. This research was financially supported by Bankard Fund for Political Economy at the University of Virginia.