Garven, 1992, "An Exposition of the Implications of Limited-Liability and Asymmetric Taxes
for Property-Liability Insurance", Journal of Risk and Insurance, 59:34-56
The tax system offers insurance for taking risk because taxes depend on outcomes; however, asymmetric taxes
on different outcomes, such as progressive rates, may discourage risk taking.
Garven (1992) examines the differences in risk incentives for mutual and stock insurers caused by the existence of asymmetric taxes combined with limited liability.
Garven, James R., 1992, An Exposition of the Implications of Limited Liability and Asymmetric Taxes for Property-Liability Insurance, Journal of Risk and Insurance, 59: 34-56.
This provides a benchmark for the effects of agency costs and asymmetric taxes. We then compare the projects' maximized value under each organizational form, for various values of the projects' joint return parameters.
As shown by Green and Talmor |10~, the effect of asymmetric taxes on investments and firm value will depend on whether or not the tax shields exceed the promised payments to the bondholder.
The second term captures the additional effect of asymmetric taxes. Consider the case when the tax rate (|T.sub.c~) is zero.
We have already discussed how asymmetric taxes tend to mitigate the JI firm's asset substitution problem.
This article elaborates upon the intuition underlying Doherty and Garven's (1986) option pricing model and extends its basic results to a further consideration of the implications of limited liability and asymmetric taxes for pricing and risk incentives in property-liability insurance.
The third section analyzes the incentive implications of limited liability and asymmetric taxes for stock and mutual organizations.
Pricing Implications of Limited Liability and Asymmetric Taxes
Consequently, the application of the option pricing framework makes it possible to develop a "risk-incentive" hypothesis which suggests that limited liability and asymmetric taxes provide mutuals with greater disincentives for riskbearing than stock companies.