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Unlimited Liability as a Barrier to Entry


  • Carr, Jack L
  • Mathewson, G Frank


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.

Suggested Citation

  • Carr, Jack L & Mathewson, G Frank, 1988. "Unlimited Liability as a Barrier to Entry," Journal of Political Economy, University of Chicago Press, vol. 96(4), pages 766-784, August.
  • Handle: RePEc:ucp:jpolec:v:96:y:1988:i:4:p:766-84

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    References listed on IDEAS

    1. Tjalling C. Koopmans, 1963. "On the Concept of Optimal Economic Growth," Cowles Foundation Discussion Papers 163, Cowles Foundation for Research in Economics, Yale University.
    2. S. Clemhout & H. Y. Wan, 1970. "Learning-by-Doing and Infant Industry Protection," Review of Economic Studies, Oxford University Press, vol. 37(1), pages 33-56.
    3. Kelvin J. Lancaster, 1966. "A New Approach to Consumer Theory," Journal of Political Economy, University of Chicago Press, vol. 74, pages 132-132.
    4. Kenneth J. Arrow, 1962. "The Economic Implications of Learning by Doing," Review of Economic Studies, Oxford University Press, vol. 29(3), pages 155-173.
    5. Peter A. Diamond, 1965. "Disembodied Technical Change in a Two-Sector Model," Review of Economic Studies, Oxford University Press, vol. 32(2), pages 161-168.
    6. Judd, Kenneth L, 1985. "On the Performance of Patents," Econometrica, Econometric Society, vol. 53(3), pages 567-585, May.
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