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