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Legal Environment and Contractual Choice

Author

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  • Cheng Ho Cheung

    (Department of Economics, National Central University, No. 300, Zhongda Road, Zhongli City, Taoyuan County, 32001, Taiwan)

Abstract

This paper considers contractual choice under imperfect legal systems, in particular, contracts with different timing of payment. Ex-ante payment contracts are risky for the buyer, because the seller may shirk. Ex-post payment contracts are risky for the seller, as the buyer may default. Optimal contract is solved for any given legal environment. Exchanges with lower gains from trade tend to adopt ex-post payment contracts. The seller is a better proposer than the buyer in terms of the efficiency of the proposed contract. Surprisingly, offering ex-ante payment contracts is not strictly better for the seller under any legal environment. Moreover, mixed payment contracts are also analyzed and shown to never be optimal.

Suggested Citation

  • Cheng Ho Cheung, 2022. "Legal Environment and Contractual Choice," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 22(2), pages 557-577, June.
    • Handle: RePEc:bpj:bejtec:v:22:y:2022:i:2:p:557-577:n:9
    DOI: 10.1515/bejte-2020-0098
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    More about this item

    Keywords

    contract; 2 sided moral hazard; imperfect court; timing of payment; K12; K41; D86;
    All these keywords.

    JEL classification:

    • K12 - Law and Economics - - Basic Areas of Law - - - Contract Law
    • K41 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior - - - Litigation Process
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law

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