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Unlimited Liability as a Barrier to Entry

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  • Carr, Jack L
  • Mathewson, G Frank
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    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. Copyright 1988 by University of Chicago Press.

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    Bibliographic Info

    Article provided by University of Chicago Press in its journal Journal of Political Economy.

    Volume (Year): 96 (1988)
    Issue (Month): 4 (August)
    Pages: 766-84

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    Handle: RePEc:ucp:jpolec:v:96:y:1988:i:4:p:766-84

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    Web page: http://www.journals.uchicago.edu/JPE/

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    Cited by:
    1. T.A. Bhavani & Suresh D. Tendulkar, 2010. "Determinants of Firm-level Export Performance: A Case Study of Indian Textile Garments and Apparel Industry," Working Papers id:2964, eSocialSciences.
    2. Dye, Ronald A., 1995. "Incorporation and the audit market," Journal of Accounting and Economics, Elsevier, vol. 19(1), pages 75-114, February.
    3. Florian Buck, 2014. "Financial Regulation and the Grabbing Hand," CESifo DICE Report, Ifo Institute for Economic Research at the University of Munich, vol. 11(4), pages 03-13, 01.
    4. Acheson, Graeme G. & Turner, John D., 2008. "The death blow to unlimited liability in Victorian Britain: The City of Glasgow failure," Explorations in Economic History, Elsevier, vol. 45(3), pages 235-253, July.
    5. Demirguc-Kunt, Asli & Love, Inessa & Maksimovic, Vojislav, 2006. "Business environment and the incorporation decision," Journal of Banking & Finance, Elsevier, vol. 30(11), pages 2967-2993, November.
    6. Michael Smart, 1996. "On limited liability and the development of capital markets: An historical analysis," Working Papers msmart-96-02, University of Toronto, Department of Economics.
    7. Paolo Maggioni, 2011. "Limited liability and shares’ pricing: sufficient but not necessary," Openloc Working Papers 1115, Public policies and local development.
    8. Kroszner, Randall, 1995. "Free banking : the Scottish experience as a model for emerging economies," Policy Research Working Paper Series 1536, The World Bank.
    9. Richard S. Grossman & Masami Imai, 2011. "Contingent Capital and Bank Risk-Taking among British Banks before World War I," Wesleyan Economics Working Papers 2011-003, Wesleyan University, Department of Economics.
    10. T. A. Bhavani & Suresh Tendulkar, 2001. "Determinants of firm-level export performance: a case study of Indian textile garments and apparel industry," The Journal of International Trade & Economic Development, Taylor & Francis Journals, vol. 10(1), pages 65-92.
    11. Nuno Garoupa, . "Regulation of Professions in the US and Europe: A Comparative Analysis," American Law & Economics Association Annual Meetings 1053, American Law & Economics Association.
    12. T.A Bhavani & Suresh D. Tendulkar, 2000. "Determinants of Firm-level Export Performance: A Case Study of Indian Textile Garments and Apparel Industry," Working papers 81, Centre for Development Economics, Delhi School of Economics.
    13. Paolo Maggioni, 2011. "The introduction of limited liability in nineteenth century England," Openloc Working Papers 1116, Public policies and local development.
    14. Camille Chaserant & Sophie Harnay, 2013. "The regulation of quality in the market for legal services: Taking the heterogeneity of legal services seriously," European Journal of Comparative Economics, Cattaneo University (LIUC), vol. 10(2), pages 267-291, August.
    15. Holthausen, Cornelia & Monnet, Cyril, 2003. "Money and payments: a modern perspective," Working Paper Series 0245, European Central Bank.
    16. Spiros Bougheas & Saksit Thananittayaudom, 2006. "Financial Predation by the "Weak"," International Journal of Business and Economics, College of Business, and College of Finance, Feng Chia University, Taichung, Taiwan, vol. 5(3), pages 231-244, December.
    17. Atilano Jorge Padilla & Alejandro Requejo, 2000. "The Cost and Benefits of the Strict Protection of Creditor Rights: Theory and Evidence," Research Department Publications 3084, Inter-American Development Bank, Research Department.
    18. Charles Hickson & John Turner, 2002. "The trading of unlimited liability bank shares: the Bagehot Hypothesis," ESRC Centre for Business Research - Working Papers wp241, ESRC Centre for Business Research.

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