Limiting Liability? – Risk and Ambiguity Attitudes Under Real Losses
Schmalenbach Business Review, Vol. 65, January 2013, pp. 54-75
22 Pages Posted: 16 Oct 2013
Date Written: 2013
Using a laboratory experiment in which the unlimited liability treatment involves real out-of-pocket losses, we investigate and compare the behavioral effects of auditors’ limited and unlimited liability on behavior under risk and ambiguity. We find that aversion to both risk and ambiguity are higher under unlimited liability than under limited liability, and that these two constructs are correlated under unlimited liability. Our findings explain why some auditors might be hindered in performing their duties properly under unlimited liability. Further, our findings emphasize the importance of appropriately modeling risk and ambiguity attitudes in economic models on liability.
Keywords: Ambiguity, Auditor Liability, Experimental Economics, Limited Liability, Risk Aversion
JEL Classification: C91, K13, M42
Suggested Citation: Suggested Citation