Vinay Gupta has a fascinating article on WorldChanging that characterizes limited liability corporations as a form of government subsidy (because otherwise, these companies would have to take out expensive liability insurance). Gupta posits that thhis creates a "perverse incentive" to do bad things, like pollute, and wonders aloud what would happen if LLCs were phased out:
What if we phased out limited liability? Suppose, for example, we made shareholders liable for up to 1% of their assets in corporate bankruptcy cases – you can lose up to 1% of your net worth to cover the unpaid debts of corporations in which you own stock. Would that change shareholder behavior to less risky investments? Would it cool the economy – or increase corporate responsibility at no cost to the tax payer?
Could regulating the degree of investor protection become one way of pulling corporations back into line when corruption becomes rife? Would ENRON have happened if shareholders had been even partially liable?
I'm not enough of an economist to really understand the implications of this idea, but I'd like to open the floor up to discussion: is viewing limited liability as a subsidy to the investor a valid way of thinking about it, and is reducing that subsidy to the investor a plausible way of making our economy a little more risk-averse and therefor environmentally responsible?
