Please rotate your device to landscape mode to view the charts.

Limited Liability and Investment: Evidence from Changes in Marital Property Laws in the US South, 1840-1850

Journal: Journal of Financial Economics

Date: 20201001

Author: Koudijs, Peter; Salisbury, Laura

Abstract:
We study the impact of marital property legislation passed in the US South in the 1840s on households' investment in risky, entrepreneurial projects. These laws protected the assets of newly married women from creditors in a world of virtually unlimited liability. We compare couples married after the passage of a marital property law with couples from the same state who were married before. Consistent with a simple model of household borrowing that trades off agency costs against risk sharing, the effect on investment was heterogeneous. It increased if most household property came from the husband and decreased if most came from the wife.

Link: Google Scholar

Key Findings

Impact of Limited Liability on Investment

Married Women's Property Acts (MWPAs) in the 1840s US South increased household investment when husbands brought more assets to marriage, but decreased investment when wives brought more assets.

Optimal Protection Level

The optimal amount of asset protection was around 25% - when protection exceeded 45% of assets, the beneficial impact disappeared due to credit constraints.

Credit Market Effects

Effects were strongest in areas with high credit dependence - cotton-intensive regions and counties with fewer retail stores and large plantations.

Asset Holdings After MWPA Introduction

  • 50% decline in assets when husband's share was below 26%
  • 50% increase in assets when husband's share was 55-72%
  • No significant effect for middle ranges or very high husband shares

Regional Variation in MWPA Effects

  • Strongest effects in cotton-intensive and sparsely populated areas
  • Significant impact in counties with limited retail capital
  • Effects particularly pronounced in poorer counties

Investment Response by Asset Protection Level

  • Peak investment at 25% asset protection
  • Sharp decline after 45% protection level
  • Demonstrates trade-off between risk-sharing benefits and credit constraints

Contribution and Implications

  • First empirical evidence of trade-off between agency costs and risk-sharing benefits in limited liability
  • Demonstrates optimal protection level exists (25%) that maximizes investment
  • Shows importance of maintaining borrower "skin in the game" while providing downside protection
  • Findings relevant for modern bankruptcy law and debtor protection policy design

Data Sources

  • Asset holdings chart based on Figure 4 showing differential effects across quintiles of husband's share in premarital assets
  • Regional variation chart constructed from coefficients in Table 7 showing heterogeneous effects across different county characteristics
  • Protection level response chart derived from theoretical predictions and empirical findings reported in Section 4 and illustrated in Figure 2