Limited Liability and Market Power |
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| Authors: | Email author" target="_blank">Teresa?A?JohnEmail author Lemma?W?Senbet Anant?K?Sundaram Peter?A?Woodward |
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| Institution: | (1) Stern School of Business, New York University, 40 West Fourth Street, New York, NY, 10012;(2) Robert H. Smith School of Business, University of Maryland, USA;(3) Thunderbird, The American Graduate School of International Management, USA;(4) Antitrust Division, US Department of Justice, USA |
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| Abstract: | This paper evaluates the welfare effects of limited liability on firm behavior when market power is present. A risk-neutral monopolist facing uncertain demand (with constant returns to scale technology) produces higher output, yielding higher expected profits when costless exit is induced by limited liability. The higher output may increase social welfare (monopolist profit plus consumer surplus) even though the monopolist may overproduce relative to the quantity that maximizes social welfare. When no market power is present, the overproduction resulting from the provision of limited liability results in loss of social welfare. Appropriate use of liability limitation laws can thus provide policy makers an additional policy instrument with which to mitigate the effects of market power.JEL Classification: D24, D41, D42, G32, G38 |
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| Keywords: | limited liability market power social welfare monopoly |
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