Entrepreneur Wealth and Demand for Limited Liability

Abstract:     
This paper uses variation in entrepreneur wealth to test the importance of limited liability in choice of organizational form. Economic theory suggests that wealthy entrepreneurs demand liability protection to shield their personal assets. Yet, despite an extensive theoretical literature there are no empirical studies which directly address this issue. Using restricted-access data from the Kauffman Firm Survey, I find that entrepreneurs with higher levels of exposed wealth are more likely to form a limited liability entity. I use state-level property exemptions to measure exogenous variation in an entrepreneur’s liability exposure. This study provides support for the economic theory of limited liability and improves our understanding of an entrepreneur’s choice of organizational form.

Number of Pages in PDF File: 42

Keywords: Limited liability, choice of form, property exemptions

JEL Classification: K22

working papers series