Why do banks remain passive? In a model of bank-firm relationship we study the trade-off a bank faces when having defaulting firms declared bankrupt. First, the bank receives a payoff if a firm is liquidated. Second, it provides information about a firm's type to its competitors. Thereby,...

Limited liability may result in inefficient accident prevention, because a relevant portion of the expected harm is externalized on victims. This paper shows that under some restrictive conditions further limiting liability by means of a liability cap can improve caretaking.