Limitations on or total prohibition of usury (or interest) have been a pervasive theme across religions and ancient societies. Since medieval times, two major institutional changes relating to non-performance of debt contracts have taken place, namely, the abolition of slavery and the evolution...

A principal seeks to efficiently allocate a productive public resource to a number of possible users. Vickrey–Clarke–Groves (VCG) mechanisms provide a detail-free way to do so provided users have deep pockets. In practice however, users may have limited resources. We study a dynamic...

We analyze a multitasking model with a verifiable routine task and a skill-dependent activity characterized by moral hazard. Contracts negotiated by firm/employee pairs follow from Nash bargaining. High- and low-skilled employees specialize, intermediate productivity employees perform both...

This study analyzes the impact of secondary tax liability borne by stockholders, an exception to the principle of limited liability, on corporate investment. The paper constructs a model of a firm to examine the effect of this secondary tax liability, finding that the violation of limited...

Does enhanced shareholder liability reduce bank failure? We compare the performance of around 4,200 state-regulated banks of similar size in neighboring U.S. states with different liability regimes during the Great Depression. The distress rate of limited liability banks was 29% higher than that...

Within the context of expected utility and in a discrete loss setting, we provide a complete account of the demand for insurance by strictly-risk averse agents and risk-neutral firms when they enjoy limited liability. When exposed to a bankrupting, binary loss and under actuarially fair prices,...

Limited liability companies went mainstream in 1988, began to capture the market for closely held businesses in 1997, and now have the lion’s share of that market. Since the advent of limited liability companies, a corporate-like liability shield, in addition to pass-through status under...

In today's world, which is described a global village, competition has intensified and the encouragement of entrepreneurship has become crucial for the development of countries.Especially at the beginning of the 19th century, states have been in search of finding finance for large projects that...

Is excessive risk-taking in credit cycles driven by incentives or biased beliefs? I propose a framework suggesting that the two are actually related and, specifically, that procyclical overoptimism can arise rationally from risk-taking incentives. I show that when firms and banks have a limited...

Does limited liability on damages improve social efficiency? I show that the efficient liability rule is determined by the tradeoff between damages to the tort claimants and benefits to the outside stakeholders (consumers, employees, suppliers, communities, governments, etc). Full liability...

The paper shows how the traditional credit model based on contingent claims analysis can be adjusted when the capital structure includes a short position in a call or put option. The stochastic features of the asset underlying the option introduce additional risk elements into the analysis of...

Many low-wage workers in the United States are subject to non-compete clauses, which forbid them to work for competitors. Empirical research has found a link between the prevalence of non-compete clauses and minimum wage legislation. To explain this link, we propose a moral hazard model with...

This paper investigates whether limited liability affects risk-taking through motivated beliefs. To do so, we run a within-subject experiment in which subjects invest in a risky asset under full or limited liability. In both cases, before the investment is made, subjects observe a noisy signal...

We analyze a multitasking model with a verifiable routine task and a skill-dependent activity characterized by moral hazard. Contracts negotiated by firm/employee pairs follow from Nash bargaining. High- and low-skilled employees specialize, intermediate productivity employees perform both...

A principal seeks to efficiently allocate a productive public resource to a number of possible users. Vickrey-Clarke-Groves (VCG) mechanisms provide a detail-free way to do so provided users have deep pockets. In practice however, users may have limited resources. We study a dynamic allocation...

Cryptocurrencies are based on digitally signed updates (transactions) to a ledger maintained in a decentralized manner according to consensus mechanisms in compliance with consented protocols. Cryptocurrency systems are subject to several levels of governance. Self-regulation is crucial for...

We investigate how a combination of limited liability and preexisting debt distort firms’ investment and equity payout decisions. We show that equity holders have incentives to “double-sell” cash flows in default, leading to overinvestment, provided that the firm has preexisting debt and...

We examine how auditors’ use of limited liability agreements (LLAs) impact perceptions of private company creditworthiness in a 2×2 between-subjects experiment. Ninety-three United States-based bank loan officers evaluate whether LLA clauses and the size of the company’s external auditor...

Using a new experimental design, we compare how subjects form beliefs in an investor-client setup under varying degrees of liability. Our results reflect the importance of social preferences when making investment decisions for others. We show that when investors have no liability, those with...

The existing delegation literature has focused on different preferences of principal and agent concerning project selection, which makes delegating authority costly for the principal. This paper shows that delegation has a cost even when the preferences of principal and agent are exogenously...

Riordan and Sappington (JET, 1988) show that in an agency relationship in which the agent's type is correlated with a public ex post signal, the principal may attain first best (full surplus extraction and efficient output levels) if the agent is faced with a lottery such that each type is...

The City of Glasgow Bank failure in 1878, which led to large numbers of shareholders becoming insolvent, generated great public concern about their plight, and led directly to the 1879 Companies Act, which paved the way for the adoption of limited liability for all shareholders. In this paper,...

Does enhanced shareholder liability reduce bank failure? We compare the performance of around 4,200 state-regulated banks of similar size in neighboring U.S. states with different liability regimes during the Great Depression. The distress rate of limited liability banks was 29% higher than that...

In this paper we examine the effects of limited liability on mortgage dynamics. While the literature has focused on default rates, renegotiation, or loan rates individually, we study them together as equilibrium outcomes of the strategic interaction between lenders and borrowers. We present a...

Without exaggeration, a company with limited liability protection is the greatest invention ever to make an unlimited profit with limited liability or without risk to personal assets of shareholders. As per this doctrine of limited liability, the shareholders are liable for the company’s debts...

We analyze a limited liability credit market where the borrowers need to borrow to implement their chosen projects with uncertain outcome. We allow borrowers to invest in resolution of the uncertainty in the project outcome before implementing the project. Our paper provides a complete...

In this paper we examine the effects of limited liability on mortgage dynamics. While the literature has focused on default rates, renegotiation, or loan rates individually, we study them together as equilibrium outcomes of the strategic interaction between lenders and borrowers. We present a...

Although limited liability is invoked as a tool to promote economic growth, this paper explains that limited liability has evolved such that it is automatically awarded upon the creation of a legal vehicle, often in situations where it was never meant to apply (eg between a parent and its...

The article analyses the use of substantive consolidation in view of the meaning of limited liability in Brazil and explores the proposition that such a solution to corporate distress should only exceptionally be imposed on creditors. In light of Brazilian corporate law, a court should only...

Modern society mitigates and transfers risks in a variety of ways, which range from catastrophe prevention and insurance solutions through to injustices of a minor and inconspicuous nature. We illustrate that the measures taken depend on the uncertainty about the risks in question, and involve...

This paper investigates whether limited liability and moral hazard affect risk-taking through motivated beliefs. On the one hand, limited liability pushes investors towards taking excessive risks. On the other, such excesses make it hard for investors to maintain a positive self-image when moral...

In this paper we examine the effects of limited liability on mortgage dynamics. While the literature has focused on default rates, renegotiation, or loan rates individually, we study them together as equilibrium outcomes of the strategic interaction between lenders and borrowers. We present a...

This paper investigates whether limited liability and moral hazard affect risk-taking through motivated beliefs. On the one hand, limited liability pushes investors towards taking excessive risks. On the other, such excesses make it hard for investors to maintain a positive self-image when moral...