ERC Consolidator Grant for financial economist Professor Peter Koudijs

Dean Patrick Groenen about this impressive achievement: ‘The ERC’s decision confirms Peter Koudijs’ individual academic excellence and reinforces the high standing of our school’s research in financial economics. Moreover, because the project combines expertise from finance, entrepreneurship, econometrics, law and historical analysis it is also an excellent demonstration of the breadth and depth of our school’s research projects.’

Commenting on this success Adhemare de Rijk, Funding Manager Research, states: ‘Peter joined Erasmus School of Economics from the U.S., amidst the COVID19-crisis with all its unprecedented difficulties and restrictions. Given the circumstances, he would have been forgiven for prioritising some other duties over those related to grant proposals. However, he remained focused and steady and obtained two major research grants during this challenging year. Peter’s dedication has been exemplary and proven successful with the ERC’s recognition.’

Short summary of Peter Koudijs’ ERC Consolidator Grant research project: One of Mans’s greatest inventions? Historical insights into limited Liability.

Stimulating businesses to take (appropriate) risk, grow, and innovate is high on the priority list of politicians in the Netherlands and elsewhere. In this context, limited liability – the ability to walk away from certain debts based on solid legal protection – is seen as one of the hallmarks of modern economics. It limits the downside risk that business owners personally face and thus can be expected to stimulate business development. For this reason, the Economist argued that limited liability is “one of man’s greatest inventions.” This argument is incomplete, however. Limited liability cannot remove the downside risk of an investment project, it can only move it to another party. At best, it can lead to more efficient risk sharing. Moreover, limited liability has its shortcomings – it increases moral hazard. Knowing that their liability is limited might encourage business owners to take too much risk or to reduce their effort, making lenders reluctant to lend. On top of that, limited liability can induce risk taking with significant detrimental effects for society.

This project asks what the actual effects are of providing limited liability for business owners. In today’s world, there is little variation in limited liability within a country and it is hard to make comparisons between countries. Therefore, we still know surprisingly little about this issue, despite its practical relevance. In his ERC research project, Peter Koudijs will theoretically and empirically investigate the effects of limited liability on companies, both non-financials and banks. The central research question is: What is the optimal level of limited liability for owners and managers that stimulates growth, while limiting moral hazard? The ERC project will use the 19th and early 20th century as a research laboratory. During this time period, rules on limited liability were introduced for the first time and subsequently underwent large changes. This provides a unique opportunity to study the effects of limited liability.

Peter Koudijs specialises in the history of financial markets. He studies relevant historical cases which yield important lessons for the world of today, using unique natural experiments. Prior to joining Erasmus School of Economics Peter Koudijs was Associate Professor of Finance at the Stanford Graduate School of Business where he taught History of Financial Crises in the MBA programme. He joined Stanford Graduate School of Business, after obtaining a PhD from Universitat Pompeu Fabra in Barcelona. Peter Koudijs has received various grants and fellowships from the NWO, Inet, the Economic History Association and different Dutch and Spanish scholarship programs.