Abstract
This paper analyzes the welfare effects of the recently revised Italian corporate law, that allows limited liability companies (so called societa a responsabilita limitata) to replace the fulfillment of strict capital requirements with the subscription of insurancecontracts that make capital available in case of default. We find that such insurance contracts are not convenient for insurers. However, if a benevolent planner is willing to subsidize insurers' expected losses, these contracts turn out to be welfare improving for a wide range of the relevantparameters. By calibrating the model with Italian data, we find that social welfare is maximized when the premium charged by the subsidized insurance companies is about 10% of total capitalrequirements; moreover, in this case the planner faces negligible expected losses.
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