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.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
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)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Gromb, Denis & Martimort, David, 2007. "Collusion and the organization of delegated expertise," Journal of Economic Theory, Elsevier, vol. 137(1), pages 271-299, November.
- Hendrik Hakenes & Isabel Schnabel, 2013.
"Bank Bonuses and Bail-Outs,"
Working Paper Series of the Max Planck Institute for Research on Collective Goods
2013_03, Max Planck Institute for Research on Collective Goods.
- 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.
- Steven Matthews, .
"Renegotiating Moral Hazard Contracts Under Limited Liability and Monotonicity,"
Penn CARESS Working Papers
a1fc611f7c8c403f24c4d20a6, Penn Economics Department.
- Matthews, Steven A., 2001. "Renegotiating Moral Hazard Contracts under Limited Liability and Monotonicity," Journal of Economic Theory, Elsevier, vol. 97(1), pages 1-29, March.
- Steven Matthews, . "Renegotiating Moral Hazard Contracts Under Limited Liability and Monotonicity," CARESS Working Papres 99-04, University of Pennsylvania Center for Analytic Research and Economics in the Social Sciences.
- Bernard S. Black & Brian R. Cheffins & Michael Klausner, 2006. "Outside Director Liability: A Policy Analysis," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 162(1), pages 5-20, March.
- Malcomson James M, 2009.
"Principal and Expert Agent,"
The B.E. Journal of Theoretical Economics,
De Gruyter, vol. 9(1), pages 1-36, May.
- Michael Raith, 2008.
"Specific knowledge and performance measurement,"
RAND Journal of Economics,
RAND Corporation, vol. 39(4), pages 1059-1079.
- Fama, Eugene F & Jensen, Michael C, 1983. "Separation of Ownership and Control," Journal of Law and Economics, University of Chicago Press, vol. 26(2), pages 301-25, June.
- Gutierrez, Maria, 2003. " An Economic Analysis of Corporate Directors' Fiduciary Duties," RAND Journal of Economics, The RAND Corporation, vol. 34(3), pages 516-35, Autumn.
Blog mentionsAs found by EconAcademics.org, the blog aggregator for Economics research:reading list or among the top items on IDEAS.Access and download statisticsgeneral information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Katharina Rautenberg).
If references are entirely missing, you can add them using this form.