When a town gets rich, business owners actually stop hiding behind 'limited liability' and start putting their own necks on the line for company debts.
March 27, 2026
Original Paper
How does Economic Development Influence Firm Forms? Evidence from the Chinese Accounting Industry
SSRN · 6350218
The Takeaway
While limited liability is seen as a hallmark of modern business, this research shows that when people have enough personal savings to buffer against risk, they prefer partnerships. This allows them to signal higher quality and trust to clients by showing they have 'skin in the game.'
From the abstract
This study offers a unique perspective on how economic structures influence firm forms and relevant institutions. It argues that in certain service industries, when residents have higher savings to buffer against risk, businesses are more likely to be organized as partnership firms rather than as limited liability companies. This phenomenon can also influence regulators, leading to the development of formal institutions governing firms. This study validates the argument using data from the Chine