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


Engert, Andreas ; Goldlücke, Susanne


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URL: https://ub-madoc.bib.uni-mannheim.de/32959
URN: urn:nbn:de:bsz:180-madoc-329593
Document Type: Working paper
Year of publication: 2013
The title of a journal, publication series: Working Paper Series
Volume: 13-04
Place of publication: Mannheim
Publication language: English
Institution: School of Law and Economics > VWL, Angewandte Mikroökonomische Theorie (Juniorprofessur) (Goldlücke 2011-13)
MADOC publication series: Department of Economics > Working Paper Series
Subject: 330 Economics
Classification: JEL: K13 , K22 , M53,
Keywords (English): business judgment rule , manager liability , delegated decision-making
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.

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Engert, Andreas ; Goldlücke, Susanne (2013) Why agents need discretion: The business judgment rule as optimal standard of care. Open Access Working Paper Series Mannheim 13-04 [Working paper]
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