Why agents need discretion: The business judgment rule as optimal standard of care
AbstractShould managers be liable for ill-conceived business decisions? One answer is given by U.S. courts, which almost never hold managers liable for their mistakes. In this paper, we address the question in a theoretical model of delegated decision making. We find that courts should indeed be lenient as long as contracts are restricted to be linear. With more general compensation schemes, the answer depends on the precision of the court’s signal. If courts make many mistakes in evaluating decisions, they should not impose liability for poor business judgment.
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Bibliographic InfoPaper provided by University of Mannheim, Department of Economics in its series Working Papers with number 13-04.
Date of creation: 2013
Date of revision:
business judgment rule ; manager liability ; delegated decision-making;
Find related papers by JEL classification:
- K13 - Law and Economics - - Basic Areas of Law - - - Tort Law and Product Liability; Forensic Economics
- K22 - Law and Economics - - Regulation and Business Law - - - Business and Securities Law
- M53 - Business Administration and Business Economics; Marketing; Accounting - - Personnel Economics - - - Training
This paper has been announced in the following NEP Reports:
- NEP-ALL-2013-03-02 (All new papers)
- NEP-BEC-2013-03-02 (Business Economics)
- NEP-HRM-2013-03-02 (Human Capital & Human Resource Management)
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