The Economic Theory of Derivative Actions

28 Pages Posted: 10 Oct 2011 Last revised: 3 Nov 2011

See all articles by Diego G. Pardow

Diego G. Pardow

University of California at Berkeley, School of Law

Date Written: October 9, 2011


This paper offers a model to formalize the economic theory of derivative actions developed during the last 30 years. From this perspective, the derivative action presents two interrelated problems. The first is how to solve the collective action problem that prevents that minority shareholders file a suit. The second is how to control the risk of collusive settlements between the defendant manager and the plaintiff’s attorney. This model identifies the fundamental tradeoffs that are implicit in these problems, as well as an optimum that could be used as normative benchmark. In brief, it argues that if the goal of derivative actions consists in increasing the shareholder’s wealth, then its policy purpose can be summarized as minimizing the sum of inefficient harms and insurance premia.

Keywords: Derivative actions, Corporate governance, Fiduciary duties

JEL Classification: K22, K41

Suggested Citation

Pardow, Diego G., The Economic Theory of Derivative Actions (October 9, 2011). Available at SSRN: or

Diego G. Pardow (Contact Author)

University of California at Berkeley, School of Law ( email )

215 Law Building
Berkeley, CA 94720-7200
United States

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