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

James Malcomson

No 453, Economics Series Working Papers from University of Oxford, Department of Economics

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 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.

Keywords: Managers; Risky decisions; Limited liability; Principal-agent contracts; Asymmetric information (search for similar items in EconPapers)
JEL-codes: D82 D86 J33 M52 (search for similar items in EconPapers)
Date: 2009-10-01
New Economics Papers: this item is included in nep-bec, nep-cbe and nep-cta
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Citations: View citations in EconPapers (2)

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Related works:
Journal Article: Do Managers with Limited Liability Take More Risky Decisions? An Information Acquisition Model (2011)
Working Paper: Do Managers with Limited Liability Take More Risky Decisions? An Information Acquisition Model (2010)
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