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

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Author Info
James M. Malcomson

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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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Paper provided by University of Oxford, Department of Economics in its series Economics Series Working Papers with number 453.

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Date of creation: 2009
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Handle: RePEc:oxf:wpaper:453

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Related research
Keywords: Managers; Risky decisions; Limited liability; Principal-agent contracts; Asymmetric information;

Find related papers by JEL classification:
D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information
D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods
M52 - Business Administration and Business Economics; Marketing; Accounting - - Personnel Economics - - - Compensation and Compensation Methods and Their Effects

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This page was last updated on 2009-12-4.

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