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Active Courts and Menu Contracts

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Author Info

  • Luca Anderlini
  • Leonardo Felli
  • Andrew Postlewaite

Abstract

We describe and analyze a contractual environment that allows a role for an active court.The model we analyze is the same as in Anderlini, Felli, and Postlewaite (2006). Anactive court can improve on the outcome that the parties would achieve without it. Theinstitutional role of the court is to maximize the parties' welfare under a veil ofignorance.In Anderlini, Felli, and Postlewaite (2006) the possibility of "menu contracts" betweenthe informed buyer and the uninformed seller is described but not analyzed. Here, wefully analyze this case.We find that if we maintain the assumption that one of the potential objects of trade is notcontractible ex-ante, the results of Anderlini, Felli, and Postlewaite (2006) survive intact.If however we let all "widgets" be contractible ex-ante, then multiple equilibria obtain. Inthis case the role for an active court is to ensure the inefficient pooling equilibria do notexist alongside the superior ones in which separation occurs.

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Bibliographic Info

Paper provided by Suntory and Toyota International Centres for Economics and Related Disciplines, LSE in its series STICERD - Theoretical Economics Paper Series with number /2006/511.

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Date of creation: Oct 2006
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Handle: RePEc:cep:stitep:/2006/511

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Web page: http://sticerd.lse.ac.uk/_new/publications/default.asp

Related research

Keywords: Optimal Courts; Informational Externalities; Ex-ante Welfare; Informed Principal; Menu Contracts.;

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References

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  1. Maskin, Eric & Tirole, Jean, 1990. "The Principal-Agent Relationship with an Informed Principal: The Case of Private Values," Econometrica, Econometric Society, vol. 58(2), pages 379-409, March.
  2. Luca Anderlini, Leonardo Felli, & Andrew Postlewaite, . "Should Courts Always Enforce What Contracting Parties Write?," Working Papers gueconwpa~03-03-29, Georgetown University, Department of Economics.
  3. David Kreps & Robert Wilson, 1998. "Sequential Equilibria," Levine's Working Paper Archive 237, David K. Levine.
  4. Luis Corchón & Sandeep Baliga & Tomas Sjöström, 1995. "The Theory Of Implementation When The Planner Is A Player," Working Papers. Serie AD 1995-14, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie).
  5. Maskin, Eric & Tirole, Jean, 1992. "The Principal-Agent Relationship with an Informed Principal, II: Common Values," Econometrica, Econometric Society, vol. 60(1), pages 1-42, January.
  6. Cho, In-Koo & Kreps, David M, 1987. "Signaling Games and Stable Equilibria," The Quarterly Journal of Economics, MIT Press, vol. 102(2), pages 179-221, May.
  7. Moore, John & Repullo, Rafael, 1988. "Subgame Perfect Implementation," Econometrica, Econometric Society, vol. 56(5), pages 1191-1220, September.
  8. Fudenberg, Drew & Tirole, Jean, 1991. "Perfect Bayesian equilibrium and sequential equilibrium," Journal of Economic Theory, Elsevier, vol. 53(2), pages 236-260, April.
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Cited by:
  1. Luca Anderlini & Leonardo Felli & Andrew Postlewaite, 2006. "Should Courts always Enforce what Contracting Parties Write?," CESifo Working Paper Series 1847, CESifo Group Munich.

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