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Do Managers with Limited Liability Take More Risky Decisions? An Information Acquisition Model

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  • James M. Malcomson

Abstract

Risk-neutral individuals take more risky decisions when they have limited liability.� Risk-neutral managers may not when acting as agents under contract and taking costly actions to acquire informatin before taking decisions.� Limited liability makes it optimal to increase the reward for outcomes relatively more likely to arise from desirable than from undesirable actions.� The resulting decisions may be less, rather than more, risky.� Making a decision after acquiring information provides an additional reason to those in the classic principal-agent literature for using contracts with pay increasing in the return.� Further results on the form of contracts are also derived.

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Article provided by Wiley Blackwell in its journal Journal of Economics & Management Strategy.

Volume (Year): 20 (2011)
Issue (Month): 1 (03)
Pages: 83-120

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Handle: RePEc:bla:jemstr:v:20:y:2011:i:1:p:83-120

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  1. Léonard,Daniel & Long,Ngo van, 1992. "Optimal Control Theory and Static Optimization in Economics," Cambridge Books, Cambridge University Press, number 9780521337465, April.
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  6. Feess, Eberhard & Walzl, Markus, 2004. "Delegated expertise--when are good projects bad news?," Economics Letters, Elsevier, vol. 82(1), pages 77-82, January.
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  8. Rogerson, William P, 1985. "The First-Order Approach to Principal-Agent Problems," Econometrica, Econometric Society, vol. 53(6), pages 1357-67, November.
  9. Peter Diamond, 1998. "Managerial Incentives: On the Near Linearity of Optimal Compensation," Journal of Political Economy, University of Chicago Press, vol. 106(5), pages 931-957, October.
  10. Innes, Robert D., 1990. "Limited liability and incentive contracting with ex-ante action choices," Journal of Economic Theory, Elsevier, vol. 52(1), pages 45-67, October.
  11. Bruno Biais & Catherine Casamatta, 1999. "Optimal Leverage and Aggregate Investment," Journal of Finance, American Finance Association, vol. 54(4), pages 1291-1323, 08.
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Cited by:
  1. Citci, Haluk & Inci, Eren, 2012. "The Masquerade Ball of the CEOs and the Mask of Excessive Risk," MPRA Paper 35979, University Library of Munich, Germany.

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