This paper examines firm responses to the entire distribution of potential liability by studying power line-ignited fires in California’s electric utility sector. In this setting, when a power line-ignited fire damages a structure, the owner of the power line assumes the cost. The unique setting allows me to estimate how firm precautions vary across the entire distribution of liabilities they face. Using exogenous variation in firms’ expected liabilities from potential fire ignitions across days, I show that, on average, firms are 0.03 percentage points more likely to take costly precautionary actions as the level of expected liability that they face increases by 10 % (mean of 0.6 %). Applying a back of the envelope calculation suggests that, at its mean distribution circuit, the most responsive firm increases precautionary investments by $10 per dollar increase in its expected liability. Furthermore, I show that firms’ precautionary responses weaken as the likelihood of bankruptcy from expected liability increases. Applying the estimates to a stylized model implies that limiting firms’ exposure to liability across their service territory would create aggregate social welfare benefits between $27 million and $270 million.
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