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Optimal Contracts With Enforcement Risk

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  • Nicola Gennaioli

Abstract

I build a model where potentially biased judges verify complex states by interpreting an imperfect signal whose noise captures factual ambiguities. In a sales and a financial transaction I show that judicial biases amplify and distort factual ambiguities, creating enforcement risk. To insure against such risk, parties write simple non-contingent contracts that optimally protect the party that is most vulnerable to judicial error. These results shed light on the empirical association between law and finance and rationalize salient features of real world enforcement regimes.

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File URL: http://hdl.handle.net/10.1111/j.1542-4774.2012.01107.x
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Bibliographic Info

Article provided by European Economic Association in its journal Journal of the European Economic Association.

Volume (Year): 11 (2013)
Issue (Month): 1 (02)
Pages: 59-82

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Handle: RePEc:bla:jeurec:v:11:y:2013:i:1:p:59-82

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Cited by:
  1. Andrei Shleifer & Florencio Lopez-de-Silanes & Rafael La Porta, 2008. "The Economic Consequences of Legal Origins," Journal of Economic Literature, American Economic Association, vol. 46(2), pages 285-332, June.
  2. Lu, Yi & Tao, Zhigang, 2009. "Contract enforcement and family control of business: Evidence from China," Journal of Comparative Economics, Elsevier, vol. 37(4), pages 597-609, December.
  3. Massenot, Baptiste, 2010. "Contract enforcement, litigation, and economic development," MPRA Paper 27501, University Library of Munich, Germany.
  4. Ari Van Assche & Galina A. Schwartz, 2013. "Contracting Institutions and Ownership Structure in International Joint Ventures," CIRANO Working Papers 2013s-04, CIRANO.
  5. Laura Bottazzi & Marco Da Rin & Thomas Hellmann, 2007. "The Importance of Trust for Investment: Evidence from Venture Capital," Working Papers 325, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
  6. Nicola Gennaioli & Stefano Rossi, 2013. "Contractual Resolutions of Financial Distress," Review of Financial Studies, Society for Financial Studies, vol. 26(3), pages 602-634.
  7. Nicola Gennaioli & Enrico Perotti & Giacomo Ponzetto, 2014. "Standardized Enforcement: Legal Evolution, Contract Evolution and Standardization," Working Papers 747, Barcelona Graduate School of Economics.
  8. Gennaioli, Nicola & Perotti, Enrico C & Ponzetto, Giacomo AM, 2014. "Standardized Enforcement: Access to Justice vs. Contractual Innovation," CEPR Discussion Papers 9836, C.E.P.R. Discussion Papers.
  9. Van Assche, Ari & Schwartz, Galina A., 2013. "Contracting institutions and ownership structure in international joint ventures," Journal of Development Economics, Elsevier, vol. 103(C), pages 124-132.
  10. Nicola Gennaioli & Enrico Perotti & Giacomo A. M. Ponzetto, 2013. "Legal evolution, contract evolution and standardization," Economics Working Papers 1410, Department of Economics and Business, Universitat Pompeu Fabra, revised Jul 2014.
  11. Bottazzi, L. & Da Rin, M. & Hellmann, T., 2010. "The Importance of Trust for Investment: Evidence From Venture Capital (Revision of DP 2009-43)," Discussion Paper 2010-49, Tilburg University, Center for Economic Research.
  12. Massenot, Baptiste, 2010. "Financial development in adversarial and inquisitorial legal systems," MPRA Paper 27098, University Library of Munich, Germany.

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