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

35 Pages Posted: 3 Apr 2013 Last revised: 19 Nov 2014

Andreas Engert

University of Mannheim

Susanne Goldlücke

University of Mannheim

Date Written: November 17, 2014

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, standard of care, legal uncertainty, manager liability

JEL Classification: K13, K22, M53

Suggested Citation

Engert, Andreas and Goldlücke, Susanne, Why Agents Need Discretion: The Business Judgment Rule as Optimal Standard of Care (November 17, 2014). Available at SSRN: https://ssrn.com/abstract=2243877 or http://dx.doi.org/10.2139/ssrn.2243877

Andreas Engert

University of Mannheim ( email )

Schloss Westflügel
68131 Mannheim, 68131
Germany

HOME PAGE: http://engert.info

Susanne Goldlücke (Contact Author)

University of Mannheim ( email )

Universitaetsbibliothek Mannheim
Zeitschriftenabteilung
Mannheim, 68131
Germany

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