ABSTRACT
This paper analyzes a remedy for breach of the fiduciary duty of care in a principal-advisor relationship. The advisor’s effort cost is ideologically too high for a certain investment. This bias can lead to a breach of care, if the advisor’s investigative effort is unobservable by the principal. The principal audits and sues the agent, if there is a signal indicating a breach. We show that this process does not lead to efficiency. To correct this problem we offer a mechanism which can implement efficiency. The (active) court precommits to a function whose image value scales expectation damages and depends on the degree of bias of the agent and a minimum audit probability. The damage scale factor may inflate or deflate expectation damages. We consider cases where the principal is risk neutral and risk averse.
Marino, Anthony M, Ideological Bias and Breach of the Fiduciary Duty of Care (November 26, 2025).
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