Risk-Taking Under Limited Liability: Quantifying the Role of Motivated Beliefs

66 Pages Posted: 16 Dec 2021

See all articles by Ciril Bosch-Rosa

Ciril Bosch-Rosa

Technische Universität Berlin

Daniel Gietl

Ludwig Maximilian University of Munich (LMU)

Frank Heinemann

Technische Universität Berlin (TU Berlin)

Date Written: 2021

Abstract

This paper investigates whether limited liability and moral hazard affect risk-taking through motivated beliefs. On the one hand, limited liability pushes investors towards taking excessive risks. On the other, such excesses make it hard for investors to maintain a positive self-image when moral hazard is present. Using a novel experimental design, we show that subjects form motivated beliefs to self-justify their excessive risk-taking. For the same investment opportunity, subjects invest more and are significantly more optimistic about the success of the investment if their failure can harm others. We show that more than one third of the investment increase under limited liability can be explained through motivated beliefs. Moreover, using a treatment with limited liability but no moral hazard, we show that motivated beliefs are formed subconsciously and can lead to the paradoxical result of investors taking larger risks when their investment can harm a third party than when it cannot. These results underscore the importance of motivated beliefs in regulatory policy as they show that one should target not only bad incentives but also “bad beliefs.”

JEL Classification: C910, D840, G110, G410

Suggested Citation

Bosch-Rosa, Ciril and Gietl, Daniel and Heinemann, Frank, Risk-Taking Under Limited Liability: Quantifying the Role of Motivated Beliefs (2021). CESifo Working Paper No. 9477, Available at SSRN: https://ssrn.com/abstract=3985775 or http://dx.doi.org/10.2139/ssrn.3985775

Ciril Bosch-Rosa (Contact Author)

Technische Universität Berlin ( email )

Straße des 17. Juni 135,
Fakultat VII, Sekretariat H52
Berlin, 10623
Germany

Daniel Gietl

Ludwig Maximilian University of Munich (LMU) ( email )

Geschwister-Scholl-Platz 1
Munich, DE Bavaria 80539
Germany

Frank Heinemann

Technische Universität Berlin (TU Berlin) ( email )

Straße des 17
Juni 135
Berlin, 10623
Germany

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