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Why agents need discretion: The business judgment rule as optimal standard of care

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Listed:
  • Engert, Andreas
  • Goldlücke, Susanne

Abstract

Should 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.

Suggested Citation

  • Engert, Andreas & Goldlücke, Susanne, 2013. "Why agents need discretion: The business judgment rule as optimal standard of care," Working Papers 13-04, University of Mannheim, Department of Economics.
  • Handle: RePEc:mnh:wpaper:32959
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    File URL: https://ub-madoc.bib.uni-mannheim.de/32959/1/Engert_und_Goldluecke_13-04.pdf
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    References listed on IDEAS

    as
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    3. Malcomson James M, 2009. "Principal and Expert Agent," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 9(1), pages 1-36, May.
    4. 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.
    5. 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 301-325, June.
    6. Gromb, Denis & Martimort, David, 2007. "Collusion and the organization of delegated expertise," Journal of Economic Theory, Elsevier, vol. 137(1), pages 271-299, November.
    7. 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.
    8. Michael Raith, 2008. "Specific knowledge and performance measurement," RAND Journal of Economics, RAND Corporation, vol. 39(4), pages 1059-1079.
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    Blog mentions

    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. Should managers be liable in court?
      by Economic Logician in Economic Logic on 2013-03-14 20:30:00

    More about this item

    Keywords

    business judgment rule ; manager liability ; delegated decision-making;

    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 - - Personnel Economics - - - Training

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