LIMITED LIABILITY, MORAL HAZARD, AND RISK TAKING: A SAFETY NET GAME EXPERIMENT

We model the safety net problem as a social dilemma game involving moral hazard, risk taking, and limited liability. The safety net game is compared to both an individual decision task involving full liability and the deterministic public goods game. We report experimental data to show that limited liability leads to higher risk taking in comparison to full liability; nevertheless, the difference is much smaller than predicted by theory. In the safety net game, subjects behave as if socially responsible for the losses they impose on the group. With repetition, nevertheless, a gradual emergence of the moral hazard problem arises. (JEL C9, D7, D8, H4, I1, I3)