The Limits of Limited Liability: Evidence from Industrial Pollution

The Limits of Limited Liability: Evidence from Industrial Pollution

Pat Akey, Ian Appel

Series number :

Serial Number: 
611/2019

Date posted :

July 05 2019

Last revised :

July 03 2019
SSRN Share

Keywords

  • Limited Liability • 
  • Industrial Pollution • 
  • moral hazard • 
  • Risk-shifting • 
  • investment

We study how parent liability for subsidiary environmental cleanup costs affects industrial pollution and production. Our empirical setting exploits a Supreme Court decision that strengthened parent limited liability protection for some subsidiaries.

Using a difference-in-differences framework, we find that increased liability protection for parents leads to a 5–9% increase in toxic emissions by subsidiaries. Evidence suggests the increase in pollution is driven by lower investment in abatement technologies rather than reallocation across plants or increased production. Cross-sectional tests suggest a harm-shifting motivation for these effects. Overall, our results highlight moral hazard problems associated with limited liability.

Authors

Real name:
Pat Akey
Prof.
Real name:
Ian Appel
Boston College