Akey and Appel, ‘The Limits of Limited Liability: Evidence from Industrial Pollution’

We study how parent liability for subsidiary environmental cleanup costs affects industrial pollution and production. Our empirical setting exploits a landmark Supreme Court case that strengthened limited liability protection for parents with subsidiaries located in the jurisdiction of lower courts that previously adopted weaker standards. Using a difference-in-differences framework, we find that increased liability protection for parents leads to a 10% increase in toxic emissions by subsidiaries. We do not, however, find evidence that the increase in pollution results from increased production. Rather, subsidiaries are 12-25% less likely to engage in pollution abatement activities related to production. The effects are driven by less-solvent subsidiaries as well as parents that are closer to distress, a finding consistent with risk-shifting behavior. Overall, our results highlight moral hazard problems associated with limited liability.

Akey, Pat and Appel, Ian, The Limits of Limited Liability: Evidence from Industrial Pollution (December 5, 2017).

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