An Economic Analysis of Corporate Directors' Fiduciary Duties
AbstractI present a principal-agent model where the shareholders (principal) can take legal action against the director (agent). The court's decision provides a verifiable but costly and imperfect signal on the director's fulfillment of his fiduciary duties. The director's remuneration can be made contingent not only on performance but also upon the court's decision. I show that when damage awards are high enough, the widespread use of liability insurance and limited-liability provisions that is observed in the United States is optimal because it allows for a more efficient litigation strategy to be ex post rational for the shareholders. Copyright 2003 by the RAND Corporation.
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Bibliographic InfoArticle provided by The RAND Corporation in its journal RAND Journal of Economics.
Volume (Year): 34 (2003)
Issue (Month): 3 (Autumn)
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- Aaron Finkle, 2010. "Contracts in the Shadow of the Law: Optimal Litigation Strategies within Organizations," International Journal of Business and Economics, College of Business, and College of Finance, Feng Chia University, Taichung, Taiwan, College of Business, and College of Finance, Feng Chia University, Taichung, Taiwan, vol. 9(2), pages 131-155, August.
- Engert, Andreas & Goldlücke, Susanne, 2013. "Why agents need discretion: The business judgment rule as optimal standard of care," Working Papers, University of Mannheim, Department of Economics 13-04, University of Mannheim, Department of Economics.
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