Limited liability effect on product safety

Author: Hyung Bae

Source: International Economic Journal, Volume 18, Number 3, September 2004 , pp. 409-417(9)

Publisher: Routledge, part of the Taylor & Francis Group

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Abstract:

This paper analyses how limited liability and capital size affect a firm's investment for product safety. Firms become bankrupt when their products cause accidents and they cannot compensate for the damages incurred. Relatively small firms obtain greater expected profit because they do not need to pay full damage when their products cause accidents and they become bankrupt. Thus, smaller firms may have greater incentives than larger firms to participate in risky projects. But relatively small firms may invest more for product safety because increasing their investments is not costly in case of bankruptcy.

Keywords: JEL Classification: D21; Limited liability; product safety

Document Type: Research article

DOI: http://dx.doi.org/10.1080/1016873042000275752

Publication date: 2004-09-01