From: Rafal Smigrodzki (rafal@smigrodzki.org)
Date: Wed Sep 10 2003 - 19:37:41 MDT
Randall Randall wrote:
> Well, limited liability is a State-enforced distortion of
> the market, rather than something inherent in the market.
> I agree that limited liability should be abolished.
### Why? Don't forget that tort liability (and this is the liability we are
talking about) is a almost always a function of the state court system, so
its limitations/extensions are not a matter of physical law, but malleable
convention, to a larger extent than e.g. contract law, which has a more
direct recourse to game theory, and reciprocity-based moral intuitions.
I see no reason why limited liability should be prohibited. This legal
convention allowed some increases in investment, especially for poor people.
Tort liability in this context can be satisfied by liability insurance
carried by the LLC. The assessment of risk performed by professional
adjusters for the insurance providers would determine the premiums, which
directly translate into increased stock prices of dangerous companies, and
provides incentives for limiting liability exposure (by e.g. adopting safer
business practices).
Without limited liability, stock owners would assume unlimited liability,
and only the professionals or the foolhardy can do that repeatedly.
Alternatively, only stocks carrying sufficient liability insurance would be
widely traded, but this would not differ from an LLC with insurance in
anything but name.
Abolishing LLC would change little in the economy, except for some names,
decreased reliance on stock for funding, increases in reliance on credit,
and maybe increased use of commercial insurance by businesses. The
non-professional investor would lose, and consumers would not gain.
Rafal
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