The recipients of the 2000 Mehr Award were Richard D. MacMinn and Li-Ming Han for “Limited Liability, Corporate Value, and the Demand for Liability Insurance,” The Journal of Risk and Insurance, Vol. 57, No. 4. (Dec., 1990), pp. 581-607.
This article models a corporation characterized by a positive probability of insolvency, in a financial market setting. The analysis shows that the positive insolvency probability separates the private from the social costs of the firm’s operations. It shows that, ceteris paribus, purchasing liability insurance will not create value but will shift value between claimholders. The insurance appears to change value because the corporate value does not fully reflect the value of all the stakeholders’ claims. The analysis also shows when management has an incentive to purchase insurance and that the insurance eliminates the difference between private and social costs.