ORGANIZATIONAL RESPONSES TO LEGAL LIABILITY: EMPLOYEE EXPOSURE TO HAZARDOUS MATERIALS, VERTICAL INTEGRATION, AND SMALL FIRM PRODUCTION.

Abstract

Organizations face an increasingly litigious environment. We examined responses to one class of legal threats: liability stemming from employees' on-the-job exposure to hazardous materials. We empirically investigated the impact of such exposure on the vertical integration of firms and on the percentage change in the number of small firms in an industry. In the face of legal exposure, firms are more likely to adopt a nonvertically integrated production system, and small firm production in an industry increases. These actions reduce the liability of large firms. Incentives for small firms to produce in this context are also discussed.