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Interpreting contracts: the purposive approach and non-comprehensive incentive contracts

Author

Listed:
  • Benjamin Bental

    (University of Haifa
    EBS University)

  • Bruno Deffains

    (University Paris 2, Pantheon Assas)

  • Dominique Demougin

    (University Paris 2, Pantheon Assas
    Technical University)

Abstract

Real world contracts often contain incentive clauses that fail to fully specify conditions triggering payments, giving rise to legal disputes. When complete contract generate Pareto efficient allocations the L&E literature advocates that courts should fill in the missing clauses. This logic does not directly extend to environments with moral hazard, where complete contracts result in constrained efficient allocations. Despite this inefficiency we find that when agency and marginal agency costs are congruent, the legal system can do no better than guide its courts to complete contracts according to the parties’ intentions.

Suggested Citation

  • Benjamin Bental & Bruno Deffains & Dominique Demougin, 2020. "Interpreting contracts: the purposive approach and non-comprehensive incentive contracts," European Journal of Law and Economics, Springer, vol. 50(2), pages 241-265, October.
    • Handle: RePEc:kap:ejlwec:v:50:y:2020:i:2:d:10.1007_s10657-020-09667-1
    DOI: 10.1007/s10657-020-09667-1
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    References listed on IDEAS

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    More about this item

    Keywords

    Asymmetric information; Balance of probabilities; Incomplete contracts; Judicial system; Courts;
    All these keywords.

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
    • K40 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior - - - General

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