Limited liability and the development of capital markets
By: by Ed Nosal and Michael Smart
Contributors: Smart, Michael; Federal Reserve Bank of Cleveland
Series: Working paper -- WP07-03; Working paper (Federal Reserve Bank of Cleveland : Online) -- WP07-03.
Publisher: Federal Reserve Bank of Cleveland
Published: 2007
Place of publication: Cleveland, Ohio]
Language: eng
Format: [electronic resource] /
Description: "We study the consequences of the introduction of widespread limited liability for corporations.  In the traditional view, limited liability reduces transactions costs and enhances investment incentives for individuals and firms.  But this view does not explain several important stylized facts of the British experience, including the slow rate of adoption of limited liability by firms in the years following legal reforms.  We construct an alternative model that accounts for this and other features of the nineteenth century British experience.  In the model, project risk is private information, and a firm's decision to adopt limited liability may be interpreted in equilibrium as a signal the firm is more likely to default.  Hence less risky firms may choose unlimited liability or forego investments entirely.  We show the choice of liability rule can lead to "development traps," in which profitable investments are not undertaken, through its effect on equilibrium beliefs of uninformed investors in the economy"--Federal Reserve Bank of Cleveland web site.
Notes: Title from PDF file as viewed on 10/29/2007.

Includes bibliographical references.

Also available in print.

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Mode of access: World Wide Web.