Large-scale risks and technological change: What about limited liability?

We consider a firm under strict liability that must choose between two risky technologies, one being safer but costlier than the other one. The total potential level of damage increases with the level of activity. We show that, under limited liability, technological change is welfare improving and leads to full risk internalization when the firms are sufficiently capitalized. Nevertheless, the percentage of firms adopting the safer technology and full risk internalization is higher under unlimited liability than under limited liability. We show how an adequate tax policy increases this percentage. We also determine the characteristics of a second-best tax policy.