The Demise of Double Liability as an Optimal Contract for Large-Bank Stockholders / Berry K. Wilson, Edward J. Kane.

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Wilson, Berry K

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Material type: Text

TextSeries: Working Paper Series (National Bureau of Economic Research) ; no. w5848.Publication details: Cambridge, Mass. National Bureau of Economic Research 1996.Description: 1 online resource: illustrations (black and white)Subject(s):

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Abstract: This paper tests the optimal-contracting hypothesis, drawing upon data from a natural experiment that ended during the Great Depression. The subjects of our experiment are bank stockholders. The experimental manipulation concerns the imposition of state or federal restrictions on the contracts they write with bank creditors. We contrast stockholders that were subject to the now-conventional privilege of limited liability with stockholders that faced an additional liability in liquidation tied to the par value of the bank's capital. Our tests show that optimal contracting theory can provide an explanation both for the long survival of extended-liability rules in banking and for why they were abandoned in the 1930s.

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Item type	Home library	Collection	Call number	Status	Date due	Barcode	Item holds
Working Paper	Biblioteca Digital	Colección NBER	nber w5848 (Browse shelf(Opens below))	Not For Loan

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December 1996.

This paper tests the optimal-contracting hypothesis, drawing upon data from a natural experiment that ended during the Great Depression. The subjects of our experiment are bank stockholders. The experimental manipulation concerns the imposition of state or federal restrictions on the contracts they write with bank creditors. We contrast stockholders that were subject to the now-conventional privilege of limited liability with stockholders that faced an additional liability in liquidation tied to the par value of the bank's capital. Our tests show that optimal contracting theory can provide an explanation both for the long survival of extended-liability rules in banking and for why they were abandoned in the 1930s.