Endogenous Determination of the Liability Rule in Oligopolistic Markets
AbstractWe address the following question: Why do most large firms select limited liability as their business organizational form in the real world? We construct a two-stage game. In the first stage, each of the oligopolistic firms chooses its business organizational form, while in the second stage, each behaves in a Cournot fashion. The following conclusions are established. (1) Even if an unlimited liability firm is viable, all firms become limited liability entities in equilibrium. (2) The equilibrium industry configuration, where all firms become limited liability entities, achieves efficiency in the second-best sense.
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Bibliographic InfoPaper provided by School of Economics, Kwansei Gakuin University in its series Discussion Paper Series with number 91.
Length: 14 pages
Date of creation: Jul 2012
Date of revision: Jul 2012
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business organizational form; limited liability; unlimited liability; Cournot oligopoly;
Find related papers by JEL classification:
- G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
- K22 - Law and Economics - - Regulation and Business Law - - - Business and Securities Law
- L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
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