Using decoupling and deep pockets to mitigate judgment-proof problems

We examine how financial penalties for social damages can be structured to mitigate judgment-proof problems, These problems occur when a producer has insufficient wealth to compensate victims for the most serious damages that can arise from his activities. We demonstrate that a policy in which assessed penalties are decoupled from realized damages generally generates greater social surplus than does a policy of compensatory damages. We also show that a lender's deep pockets can generally be employed to mitigate judgment-proof problems, despite recent suggestions to the contrary in the literature. (C) 1999 by Elsevier Science Inc.