This paper describes simple contract-theoretical settings where the parties optimally choose to stipulate unverifiable … or unenforceable contracts. The only manner to achieve the first-best is to stipulate a roundabout contract that … liability limitations such as a damage-compensation restriction on transfers, or individual liability rule …

We examine the effect of liability protection on the compensation of directors and on takeover outcomes. Consistent … with the hypothesis that directors require additional compensation if they bear liability, we find that director … compensation is higher for firms that provide less liability protection. Examining takeovers, we find evidence that takeovers of …