Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/222107 
Year of Publication: 
2019
Series/Report no.: 
Discussion Paper No. 210
Publisher: 
Ludwig-Maximilians-Universität München und Humboldt-Universität zu Berlin, Collaborative Research Center Transregio 190 - Rationality and Competition, München und Berlin
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.
Subjects: 
Limited Liability
Motivated Beliefs
Experiment
JEL: 
C91
D84
G11
G41
Document Type: 
Working Paper

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