Journal of Political Economy Vol. 96 No. 4 1988
Unlimited Liability as a Barrier to Entry
Abstract
Many, but not all, firms have the freedom to choose liability rules. In some countries, service professions have unlimited liability rules imposed by government; historically, banks in some countries faced unlimited liability. Why do governments impose unlimited liability? This is the question the authors address. With a simple model, they illustrate the agency conflicts in firms. Limited liability solves these conflicts efficiently. Unlimited liability raises the cost of capital; inefficiently small firms result. But under some conditions, selectively-applied unlimited liability rules protect rents. The authors test several propositions with data on Scottish banking and U.S. law firms.
- DOI
- 10.1086/261562
- Volume
- 96
- Issue
- 4
- Pages
- 766-784
- Language
- en
- Sources
- crossref openalex