The Limits of Limited Liability: Evidence from Industrial Pollution
59 Pages Posted: 10 Dec 2017 Last revised: 15 Jun 2018
Date Written: June 1, 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 limited liability protection for parent corporations. 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 by 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: G3, G38, G30, Q52, P14
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