Limited liability and its moral hazard implications: the systemic inscription of instability in contemporary capitalism

Marie-Laure Djelic (1) , Joel Bothello (1)

1 Essec Business School

The principle of limited liability is one of the defining characteristics of modern corporate capitalism. It is also, we argue in this article, a powerful structural source of moral hazard. Engaging in a double conceptual genealogy, we investigate how the concepts of moral hazard and limited liability have evolved and diffused over time. We highlight two parallel but unconnected paths of construction, diffusion, moral contestation, and eventual institutionalization. We bring to the fore clear elective affinities between both concepts and their respective evolution. Going one step further, we suggest that both concepts have come to be connected through time. In the context of contemporary capitalism, limited liability has to be understood, we argue, as a powerful structural source of moral hazard. In conclusion, we propose that this structural link between limited liability and moral hazard is an important explanatory factor of the systemic instability of contemporary capitalism and, as a consequence, of a pattern of recurrent crises that are regularly disrupting our economies and societies.

Keywords: Moral hazard; Limited liability; Systemic instability; Financial crisis

Domains: Humanities and Social Sciences; Sociology; Humanities and Social Sciences; Economics and Finance

Marie-Laure Djelic, Joel Bothello. Limited liability and its moral hazard implications: the systemic inscription of instability in contemporary capitalism. Theory and Society, 2013, 42 (6), pp.589 - 615. ⟨10.1007/s11186-013-9206-z⟩. ⟨hal-01891963v2⟩