Limited liability and the requirement to purchase insurance

This paper seeks to answer the question whether or not compulsory liability insurance can eliminate the distortions caused by limited liability of potential injurers. The purpose of compulsory liability insurance is to control care and payment. In particular, we ask whether or not the requirement to purchase liability insurance coverage may restore the proper incentives to the injurer (the deterrence effect), provided that victims have adequate coverage (the compensation effect). We argue that the externalities due to the injurers' lack of assets may be alleviated, if insurance coverage is mandatory.