The Limits of Limited Liability: Evidence from Industrial Pollution
71 Pages Posted: 10 Dec 2017 Last revised: 30 Jun 2019
Date Written: September 7, 2018
We study how parent liability for subsidiary environmental cleanup costs affects industrial pollution and production. Our empirical setting exploits a Supreme Court decision that strengthened parent limited liability protection for some subsidiaries. Using a difference-in-differences framework, we find that increased liability protection for parents leads to a 5-9% increase in toxic emissions by subsidiaries. Evidence suggests the increase in pollution is driven by lower investment in abatement technologies rather than reallocation across plants or increased production. Cross-sectional tests suggest a harm-shifting motivation for these effects. Overall, our results highlight moral hazard problems associated with limited liability.
Keywords: Limited Liability, Industrial Pollution, Moral Hazard, Risk-shifting, Investment
JEL Classification: K22, G34, G38, Q58
Suggested Citation: Suggested Citation