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Endogenous Determination of the Liability Rule in Oligopolistic Markets

Author

Listed:
  • 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)

Abstract

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.

Suggested Citation

  • Takao Ohkawa & Tetsuya Shinkai & Makoto Okamura & Kozo Harimaya, 2012. "Endogenous Determination of the Liability Rule in Oligopolistic Markets," Discussion Paper Series 91, School of Economics, Kwansei Gakuin University, revised Jul 2012.
    • Handle: RePEc:kgu:wpaper:91
    as

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    File URL: http://192.218.163.163/RePEc/pdf/kgdp91.pdf
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    References listed on IDEAS

    as
    1. Spulber,Daniel F., 2009. "The Theory of the Firm," Cambridge Books, Cambridge University Press, number 9780521736602.
    2. Franck, Bernard & Le Pape, Nicolas, 2008. "The commitment value of the debt: A reappraisal," International Journal of Industrial Organization, Elsevier, vol. 26(2), pages 607-615, March.
    3. Wanzenried, Gabrielle, 2003. "Capital structure decisions and output market competition under demand uncertainty," International Journal of Industrial Organization, Elsevier, vol. 21(2), pages 171-200, February.
    4. Showalter, Dean M, 1995. "Oligopoly and Financial Structure: Comment," American Economic Review, American Economic Association, vol. 85(3), pages 647-653, June.
    5. Brander, James A. & Lewis, Tracy R., 1986. "Oligopoly and Financial Structure: The Limited Liability Effect," American Economic Review, American Economic Association, vol. 76(5), pages 956-970, December.
    6. Teresa John & Lemma Senbet & Anant Sundaram & Peter Woodward, 2005. "Limited Liability and Market Power," Review of Quantitative Finance and Accounting, Springer, vol. 25(3), pages 215-231, November.
    7. John S. Hughes & Jennifer L. Kao & Arijit Mukherji, 1998. "Oligopoly, Financial Structure, and Resolution of Uncertainty," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 7(1), pages 67-88, March.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    business organizational form; limited liability; unlimited liability; Cournot oligopoly;
    All these keywords.

    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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