Contractor selection problem under extended liability

► This paper solves the problem of a principal firm's choice of contracting agents under extended liability where the agents have the possibility to become an insolvent injurer. ► Negligence rule for contracting agents enhances the price competitiveness of the agent who takes proper precautions. ► Thus, the liability rule consisting of the negligence rule on contracting agents that extends liability to the principal firm is superior to other types of liability rules.