Risk-Taking under Limited Liability: Quantifying the Role of Motivated Beliefs

Ciril Bosch-Rosa, Daniel Gietl and Frank Heinemann
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Ciril Bosch-Rosa: TU Berlin
Daniel Gietl: LMU Munich

No 210, Rationality and Competition Discussion Paper Series from CRC TRR 190 Rationality and Competition

Abstract: This paper investigates whether limited liability affects risk-taking through motivated beliefs. To do so, we run a within-subject experiment in which subjects invest in a risky asset under full or limited liability. In both cases, before the investment is made, subjects observe a noisy signal that indicates whether the investment will succeed or fail. They then state the likelihood of the investment's success and decide how much to invest. Our results show a strong effect of limited liability on both the investment decision and the formation of motivated beliefs. Compared to subjects under full liability, subjects under limited liability not only invest larger amounts but are also significantly more optimistic about the success of their investments. Finally, we show that more than one-third of the increase in investment under limited liability can be explained through motivated beliefs.

Keywords: limited liability; motivated beliefs; experiment (search for similar items in EconPapers)
JEL-codes: C91 D84 G11 G41 (search for similar items in EconPapers)
Date: 2019-12-09
New Economics Papers: this item is included in nep-cbe and nep-exp
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Related works:
Working Paper: Risk-Taking under Limited Liability: Quantifying the Role of Motivated Beliefs (2021)
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Persistent link: https://EconPapers.repec.org/RePEc:rco:dpaper:210

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