Corporate Law & Economics of Limited Liability

– Lucas Bento

Here, we are proposing an overview of the economic and legal reasons of the creation of limited liability rule. We will review in a structured and organised manner as to how such topic has been studied by the mainstream scholars of the area, adding some personal analysis to the topic under combination of more recent studies of behavior law & economics and social development economics.

Limited liability is considered to be “the feature” of corporate law. From a Corporate Law & Economics perspective, for very broad and different economic stimuli and reasons, it is supposed that limited liability provides gains from improving liquidity and diversification.

Although, it is knowledge that in some cases where there is much less separation between management and risk bearing, those gains are minimal while creating a high probability that a firm will engage in a socially excessive level of risk taking. When such cases happen and are studied in closed corporations they are obviated by the piercing the corporate veil.

Here, we are proposing an overview of the economic and legal reasons of the creation of limited liability rule. We will review in a structured and organised manner as to how such topic has been studied by the mainstream scholars of the area, adding some personal analysis to the topic under combination of more recent studies of behavior law & economics and social development economics.

Read the full article here.