Vinay Gupta on Limited Liability

Vinay Gupta, author of "The Unplugged: A Speculative Fiction," has an interesting post on corporate limited liability at WorldChanging. Essentially, he argues that limited liability works as a subsidy, if you consider the cost a corporation would have to pay for insurance to cover default or tort liability.

I tend to agree with commenter Stephen A. Fuqua that limited liability against creditors is something that could be established purely by contract, and that default on debt is just one of the risks of lending money. But limited liability for torts against third parties is something else again. It seems likely that, absent this privilege, creditors would demand a corporation take out some kind of liability insurance.

For that matter, even if limited liability for debt could be established by contract, it doesn't necessarily follow that it would be as prevalent as it is now. If such liability wasn't established as a matter of course under the corporate form of organization, there might be a little more dickering about it. Some portion of creditors, at least, might choose to require default insurance as a condition of lending money. Anyway, the post provoked a great debate in the comment thread.