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Endogenous Determination of the Liability Rule in Oligopolistic Markets

  • Takao Ohkawa

    ()

    (Faculty of Economics, Ritsumeikan University)

  • Tetsuya Shinkai

    ()

    (School of Economics, Kwansei Gakuin University)

  • Makoto Okamura

    (Faculty of Economics, Ritsumeikan University)

  • Kozo Harimaya

    (Faculty of Business Administration, Ritsumeikan University)

We 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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File URL: http://192.218.163.163/RePEc/pdf/kgdp91.pdf
File Function: First version, 2012
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Paper provided by School of Economics, Kwansei Gakuin University in its series Discussion Paper Series with number 91.

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Length: 14 pages
Date of creation: Jul 2012
Date of revision: Jul 2012
Handle: RePEc:kgu:wpaper:91
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