Abstract:
This paper focuses on the costs of limited liability in the theory of the firm. Insurance may discourage the opportunistic externalization of those costs in a way that enhances optimal risk allocation for corporate stakeholders. The paper hypothesizes that insurance will enable the firm to exploit more fully the quasi-rents associated with the profitable use of its organizational capital. At a critical level of insurability, internal coordination of the insurance function by common or joint ownership might enhance the credibility of the firm's organizational capital better than market insurance would do.