Why Agents Need Discretion: The Business Judgment Rule as Optimal Standard of Care

Engert Andreas () and Susanne Goldlücke
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Engert Andreas: Department of Law, University of Mannheim, Schloss Westflügel, 68131 Mannheim, Germany

Review of Law & Economics, 2017, vol. 13, issue 1, 38

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.

Keywords: business judgment rule; manager liability; delegated decision-making (search for similar items in EconPapers)
JEL-codes: K13 K22 M53 (search for similar items in EconPapers)
Date: 2017
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Working Paper: Why agents need discretion: The business judgment rule as optimal standard of care (2013)
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DOI: 10.1515/rle-2015-0033

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