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LIMITED LIABILITY, MORAL HAZARD, AND RISK TAKING: A SAFETY NET GAME EXPERIMENT

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We model the safety net problem as a social dilemma game involving moral hazard, risk taking, and limited liability. The safety net game is compared to both an individual decision task involving full liability and the deterministic public goods game. We report experimental data to show that limited liability leads to higher risk taking in comparison to full liability; nevertheless, the difference is much smaller than predicted by theory. In the safety net game, subjects behave as if socially responsible for the losses they impose on the group. With repetition, nevertheless, a gradual emergence of the moral hazard problem arises. (JEL C9, D7, D8, H4, I1, I3)
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Document Type: Research Article

Affiliations: 1: Research Fellow, Max Planck Institute of Economics, Strategic Interaction Group, Kahlaische Straße 10, D-07745 Jena, Germany. Phone +49 3641 686 646, Fax: +49 3641 686 667 2: Professor of Finance, Université de Luxembourg, Faculté de Droit, d’Economie et de Finance, Luxembourg School of Finance, 4, rue Albert Borschette, L-1246 Luxembourg. Phone +352 466644 6285, Fax: +352 466644 6835

Publication date: April 1, 2013

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