Do Managers with Limited Liability Take More Risky Decisions? An Information Acquisition Model
AbstractRisk-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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Bibliographic InfoPaper provided by University of Oxford, Department of Economics in its series Economics Series Working Papers with number 453.
Date of creation: 01 Oct 2009
Date of revision:
Managers; Risky decisions; Limited liability; Principal-agent contracts; Asymmetric information;
Other versions of this item:
- James M. Malcomson, 2011. "Do Managers with Limited Liability Take More Risky Decisions? An Information Acquisition Model," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 20(1), pages 83-120, 03.
- James Malcomson, 2010. "Do Managers with Limited Liability Take More Risky Decisions? An Information Acquisition Model," CESifo Working Paper Series 2943, CESifo Group Munich.
- D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
- 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
This paper has been announced in the following NEP Reports:
- NEP-ALL-2009-10-10 (All new papers)
- NEP-BEC-2009-10-10 (Business Economics)
- NEP-CBE-2009-10-10 (Cognitive & Behavioural Economics)
- NEP-CTA-2009-10-10 (Contract Theory & Applications)
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