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| This is the leapfrogged world. | | This is the leapfrogged world. |
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| ==Thoughts on Limited Liability==
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| June 1, 2006 8:23 AM
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| One of the persistent threads running through environmentalism is the notion of "Corporate Responsibility." I've been thinking through some of the issues involving how corporations are formed and how the nature of the corporation affects how the economy assesses and handles risk and I'd like to present an idea for comment and examination.
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| The seed of the idea is that the limited liability corporation is a '''government subsidy to risky investments''' and as such may be partly what drives the reckless attitude of corporations towards the environment. Read on for more details.
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| So, please follow my chain of thought and see where it leads:
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| 1> The difference between a partnership and a corporation is that shareholders in a corporation are protected from liability for the debts of the corporation in bankruptcy (”limited liability.”)
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| 2> The same protection from liability could be obtained in partnership by the purchase of “liability insurance” which would, if the company you co-owned went down, cover your debts. Because of the open-ended nature of the liability being insured against, this insurance would probably be fairly expensive.
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| 3> The fiat (government-created) limited liability provided by the state is actually a subsidy at the expense of those whom bankrupted corporations owe money to, in favor of the investors, and its financial value can be calculated as the total value of the insurance services provided to investors or perhaps as the total cost to the creditors.
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| It surprises me that I can't find an analysis of how large this subsidy to investors is!
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| Possibly, if this question was analyzed, we would discover that limited liability protection is the largest goverment programme there is, perhaps even larger than the military. Plausible? Well, consider the total size of the stock market - the market capitalization of the entire economy. Now imagine insuring that. Limited liability moves a '''lot''' of wealth from creditors to investors in any given year, through bankruptcy proceedings - how much wealth is transferred in a given year?
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| This may explain why limited liability creates wealth so fast: by taking an intangible like “risk” and providing an equally intangible “protection from risk” goverments subsidied real, tangible spending with a vast, intangible subsidy.
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| The [http://en.wikipedia.org/wiki/Polluter_pays_principle Polluter Pays] principle becomes interesting when examined from this perspective. If the real polluter is not the corporation, but the benificiary of the corporation's actions - that is to say, the owners/shareholders - then making the real polluter pay may require a change in corporate law. Providing shareholders with blanket protection from the actions taken on their behalf may no longer be a sensible approach.
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| Unlimited limited liability may, in fact, be a [http://en.wikipedia.org/wiki/Perverse_incentive perverse insentive] encouraging the economy to continue high risk activities such as unregulated release of GMOs into the environment by subsidising shareholders who assume these risks in their investment strategies.
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| What if we phased out limited liability? Suppose, for example, we made shareholders liable for up to 1% of their assets in corporate bankruptcy cases - you can lose up to 1% of your net worth to cover the unpaid debts of corporations in which you own stock. Would that change shareholder behavior to less risky investments? Would it cool the economy - or increase corporate responsibility at no cost to the tax payer?
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| Could regulating the degree of investor protection become one way of pulling corporations back into line when corruption becomes rife? Would ENRON have happened if shareholders had been even partially liable?
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| I'm not enough of an economist to really understand the implications of this idea, but I'd like to open the floor up to discussion: is viewing limited liability as a subsidy to the investor a valid way of thinking about it, and is reducing that subsidy to the investor a plausible way of making our economy a little more risk-averse and therefor environmentally responsible?
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| What do you think? Please comment!
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