Monday , February 17 2020
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Limited liability is causing unlimited harm

Summary:
Rise of shareholder capitalism is largely due to limited liability accorded to the owners.  However, nothing can be constant despite its so called success. In this piece, Katharina Pistor says limited liability is causing much of the harm today: The original purpose of limited-liability protection was to encourage investment in – and risk-taking by – corporations, whose resulting innovations would benefit society. Yet by allowing shareholders to profit from the harms caused by corporations, limited liability has evolved into a source of systemic market failure. ….. So long as shareholders can gain from these externalities, they will defend them. They will fight every attempt to force an internalization of costs, including the carbon tax that the European Union is currently promoting.

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Rise of shareholder capitalism is largely due to limited liability accorded to the owners.  However, nothing can be constant despite its so called success.

In this piece, Katharina Pistor says limited liability is causing much of the harm today:

The original purpose of limited-liability protection was to encourage investment in – and risk-taking by – corporations, whose resulting innovations would benefit society. Yet by allowing shareholders to profit from the harms caused by corporations, limited liability has evolved into a source of systemic market failure.

…..

So long as shareholders can gain from these externalities, they will defend them. They will fight every attempt to force an internalization of costs, including the carbon tax that the European Union is currently promoting. Top-down regulation, they argue, is inefficient, because governments cannot possibly identify the optimal tax rate. But if that is the case, why not enable markets to price risk correctly, by removing the distortion that is currently preventing them from doing so?

The liability rules cannot be changed overnight. But changes could be phased in after a transition period that puts everyone on notice. No new multilateral treaty or complicated harmonization efforts are needed. If just a handful of countries adopted “piercing statutes” and ensured that claimants would have standing in their courts, markets would respond accordingly.

No doubt, shareholders would try to avoid liability by shifting assets to safe-haven jurisdictions, and by lobbying their own governments to protect them with the threat of trade sanctions against countries that do adopt piercing statutes. But the greater the number of countries adopting such statutes, the less successful these strong-arm tactics will be.

In the end, a subsidy that distorts markets and gives investors a license to harm is not only inefficient. It is a threat to both the market system and the natural environment upon which we all depend for our survival.

Interesting. Never thought it this way…
Amol Agrawal
I am currently pursuing my PhD in economics. I have work-ex of nearly 10 years with most of those years spent figuring economic research in Mumbai’s financial sector.

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