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Unlimited Liability as a Barrier to Entry

  • Carr, Jack L
  • Mathewson, G Frank
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    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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    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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