Limited Liability

Steve Landsburg poses an interesting question:

...it seems equally odd for a company with pockets the depth of BP’s to be engaged in as risky an activity as deep water oil drilling. Why wasn’t this project sold off to someone with a lot less to lose?

The limited liability corporation is the master institution of the modern corporate capitalist state. One of its advantages is the protection it offers its shareholders - their personal risk from mistakes or midsdeeds of the corporation is limited to their equity stake. Steve is asking why BP didn't take advantage of that. By selling its interest in the well to some smaller scale corporation which would have gone bankrupt in the first days of the spill, it might have saved itself a bundle - and stuck the citizens near the Gulf with the full bill.

This used to be standard practice in the West. Gold is found, a suitably small mining company grabs the gold, pays the stockholders, and declares bankruptcy, sticking everybody downstream with the arsenic, surfuric acid and general trail of wasted land they leave in their wake.

So what's the answer to such tactics by companies engaged in risky exploitation of natural resources? How about a huge bond or a required insurance policy? The insurance company (which would need to be regulated) would have a big stake in seeing that accidents did not happen. They might be more effective than the MMS in enforcing rigorous standards.

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