Relaxing Liquidity Constraints for Start-Ups: A Welfare Analysis Over the Italian Revised Corporate Law

Authors: Casagrande, Alberto; Spallone, Marco

Source: European Journal of Law and Economics, Volume 20, Number 3, November 2005 , pp. 339-357(19)

Publisher: Springer

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Abstract:

This paper analyzes the welfare effects of the recently revised Italian corporate law, that allows limited liability companies (so called società a responsabilità limitata) to replace the fulfillment of strict capital requirements with the subscription of insurancecontracts that make capital available in case of default. We find that such insurance contracts are not convenient for insurers. However, if a benevolent planner is willing to subsidize insurers' expected losses, these contracts turn out to be welfare improving for a wide range of the relevantparameters. By calibrating the model with Italian data, we find that social welfare is maximized when the premium charged by the subsidized insurance companies is about 10% of total capitalrequirements; moreover, in this case the planner faces negligible expected losses.

Keywords: liquidity constraints; insurance contracts; corporate law

Document Type: Research article

DOI: http://dx.doi.org/10.1007/s10657-005-4200-1

Affiliations: 1: Email: mspallone@luiss.it

Publication date: 2005-11-01