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Limited Liability and Moral Hazard Implications: An Alternative Reading of the Financial Crisis

40 Pages Posted: 1 Apr 2014  

Marie-Laure Djelic

ESSEC Business School

Bothello Joel

ESSEC Business School

Date Written: 2014

Abstract

The principle of limited liability is one of the defining characteristics of modern corporate capitalism. It is also, we argue in this paper, a powerful structural source of moral hazard. Engaging in a double conceptual genealogy, we investigate how the concepts of moral hazard and limited liability were created and diffused over time. We highlight two very similar but parallel paths of emergence, moral contestation and eventual institutionalization, and outline how the two notions have become connected through time, showing clear elective affinities between both concepts and their respective evolution. Going one step further, we suggest that both concepts have come to be connected through time. In the context of contemporary capitalism, limited liability has to be understood, we argue, as a powerful structural source of moral hazard. In conclusion, we propose that this structural link between limited liability and moral hazard is an important explanatory factor of the recent financial crisis and a seemingly intractable characteristic of modern corporate capitalism.

Keywords: moral hazard, limited liability, financial crisis

Suggested Citation

Djelic, Marie-Laure and Joel, Bothello, Limited Liability and Moral Hazard Implications: An Alternative Reading of the Financial Crisis (2014). Available at SSRN: https://ssrn.com/abstract=2418901 or http://dx.doi.org/10.2139/ssrn.2418901

Marie-Laure Djelic (Contact Author)

ESSEC Business School ( email )

3 Avenue Bernard Hirsch
CS 50105 CERGY
CERGY, CERGY PONTOISE CEDEX
France

Bothello Joel

ESSEC Business School ( email )

3 Avenue Bernard Hirsch
CS 50105 CERGY
CERGY, CERGY PONTOISE CEDEX 95021
France

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