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Delegation and Limited Liability in a Modern Capitalistic Economy

Author

Listed:
  • Tetsuya Shinkai

    (School of Economics, Kwansei Gakuin University)

  • Takao Ohkawa

    (Faculty of Economics, Ritsumeikan University)

  • Makoto Okamura

    (Economics Department, Ritsumeikan University and Hiroshima University)

  • Kozo Harimaya

    (Faculty of Business Administration, Ritsumeikan University)

Abstract

We examine an effect of limited liability on strategic delegation in a Cournot duopoly with demand uncertainty. We establish that owners of each firm always delegate their tasks, decisions, and responsibility to a manager under limited liability, while they do not always do so under unlimited liability. This result is consistent with the fact that separation of ownership and management as well as limited liability prevail in many modern large companies.

Suggested Citation

  • Tetsuya Shinkai & Takao Ohkawa & Makoto Okamura & Kozo Harimaya, 2012. "Delegation and Limited Liability in a Modern Capitalistic Economy," Discussion Paper Series 87, School of Economics, Kwansei Gakuin University, revised Apr 2012.
    • Handle: RePEc:kgu:wpaper:87
    as

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    File URL: http://192.218.163.163/RePEc/pdf/kgdp87.pdf
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    References listed on IDEAS

    as
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    3. Federico Etro, 2010. "Endogenous market structures and the optimal financial structure," Canadian Journal of Economics, Canadian Economics Association, vol. 43(4), pages 1333-1352, November.
    4. Vickers, John, 1985. "Delegation and the Theory of the Firm," Economic Journal, Royal Economic Society, vol. 95(380a), pages 138-147, Supplemen.
    5. Fershtman, Chaim & Judd, Kenneth L, 1987. "Equilibrium Incentives in Oligopoly," American Economic Review, American Economic Association, vol. 77(5), pages 927-940, December.
    6. Povel, Paul & Raith, Michael, 2004. "Financial constraints and product market competition: ex ante vs. ex post incentives," International Journal of Industrial Organization, Elsevier, vol. 22(7), pages 917-949, September.
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    Cited by:

    1. Tetsuya Shinkai & Takao Ohkawa & Makoto Okamura & Kozo Harimaya, 2012. "Why did the Dutch East India Co. outperform the British East India Co.? —A theoretical explanation based on the objective of the firm and limited liability—," Discussion Paper Series 96, School of Economics, Kwansei Gakuin University, revised Dec 2012.

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    More about this item

    Keywords

    limited liability; delegation; managerial incentives; and Cournot duopoly;
    All these keywords.

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L12 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Monopoly; Monopolization Strategies

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