Re: ECON: Corporations

Tim Hruby (
Mon, 25 Jan 1999 18:49:45 -0500

On Fri, 22 Jan 1999 13:32:17 -0800 (PST), "Lee Daniel Crocker" <> wrote:

[quoting a post of mine]
> > Well, let's point out that the benefits of the corporate form are benefits
> > confered by governments, so in effect, the government has already provided
> > certain protections to orgainzations operating under the corporate form.
> While corporate structure in the US at present is government-defined
> and supported, limited liability corporations /can/ exist without
> such support. So long as a trading firm in a free market openly
> identifies itself as a limited liability corporation and specifies
> in all its contracts that parties agree to limit the liability of
> the firm to the assets of the firm independent of those of its
> shareholders/directors, then no one is being coerced. Of course, in
> the US, all that's required is that you have "Inc." in your name and
> all those contract terms follow automatically, but those same terms
> could also be negotiated in a free market.
> It is often argued that limited liability encourages investment
> and enterprise, and that's probably true. But that's /not/ a good
> argument for government-fiat corporations; it's a good argument
> for freely contracted limited liability corporations.

Your vision of a "freely contracted limited liability corporation" does not comport with the expectation of most investors who would put their money into a limited liabilty corporation. Rather, what you envision really just a matter of non-recourse contracting. But not all economic interaction takes place at the level of contracts.

Did you not read the rest of my post? The following seems to have been overlooked:

> It is not at all clear to me
> that a potential tort-victim (as opposed to a contract partner) would
> voluntarily agree to limit his potential claim for injuries in such a
> manner (perhaps he would from a Rawls-ian "original position," but that
> line of argument is by no means universally accepted, and I won't go into
> it here). Yet without such limits, capital-owners would be _far_ more
> hesitant in making investments over which they have minimal management
> control. (Would you invest in Microsoft if Netscape could come after your
> entire personal net worth for Bill Gates' alleged tortious competition?
> Replace with Bhopal if you don't think that business torts would be
> protected under a PPL system)

The tort-victim never contracted to accept the limited liability of the investors in the above examples.

If investors did not have this marginal additional protection imposed by state fiat, we could posit that the changed risk-reward ratio would likely result in a marginal decrease in the amount of equity investement. I find it an intersting question whether that would be a "Good Thing" (which, to an economist, generally equals "more efficient")