Limited Liability and Moral Hazard Implications: An Alternative Reading of the Financial Crisis
40 Pages Posted: 1 Apr 2014
Date Written: 2014
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
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