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Title:Do managers with limited liability take more risky decisions? An information acquisition model PDF Logo
Authors:Malcomson, James M.
Issue Date:2010
Series/Report no.:CESifo working paper 2943
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 information 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.
Subjects:managers
risky decisions
limited liability
principal-agent contracts
asymmetric information
JEL:D82
D86
J33
M52
Document Type:Working Paper
Appears in Collections:CESifo Working Papers, CESifo Group Munich

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