Limited Liability and the Known Unknown

Posted by Michael Simkovic (USC Gould School of Law), on Sunday, March 4, 2018 Editor's Note: Michael Simkovic is Professor of Law at the USC Gould School of Law. This post is based on a recent article by Professor Simkovic, forthcoming in the Duke Law Journal. Limited liability is a double-edged sword. On the one hand, limited liability may help overcome investors’ risk aversion and facilitate capital formation and economic growth. On the other hand, limited liability is widely believed to contribute to excessive risk taking and externalization of losses to the public. Limited liability cannot eliminate risk. Limited liability can only transfer the adverse consequences of risk away from those who effectively decide how much risk to take and, in so doing, encourage greater risk taking and externalization of losses. Although mechanisms such as regulation, mandatory insurance, and minimum capital requirements can help mitigate the externalization problem, risks…

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