Ambiguity and Optimal Technological Choice: Does the Liability Regime Matter?

We consider a firm, from a high-risk industry, facing two available technologies. One of the two technologies is ambiguous in the sense that its probability of accident lies in a interval of objective probabilities. The firm has the possibility to invest in seeking information in order to reduce the uncertainty inherent to the ambiguous technology. We apply a model inspired by Jaffray (1989) on imprecise probabilities to study the firm’s behavior in such a context. Considering a strict liability rule, we compare the impact of two liability regimes, unlimited liability and limited liability, on the firm’s technical choice. Whatever the firm’s information seeking policy, which type of liability regime promotes which technology depends on the relative value of the marginal operating costs of the two technologies.