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Active Courts and Menu Contracts

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  • 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). An active court can improve on the outcome that the parties would achieve without it. The institutional role of the court is to maximize the parties’ welfare under a veil of ignorance. In Anderlini, Felli, and Postlewaite (2006) the possibility of “menu contracts” between the informed buyer and the uninformed seller is described but not analyzed. Here, we fully analyze this case. We find that if we maintain the assumption that one of the potential objects of trade is not contractible 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. In this case the role for an active court is to ensure the inefficient pooling equilibria do not exist alongside the superior ones in which separation occurs.

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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 1852.

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Date of creation: 2006
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Handle: RePEc:ces:ceswps:_1852

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Keywords: optimal courts; informational externalities; ex-ante welfare; informed principal; menu contracts;

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References

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  1. Fudenberg, Drew & Tirole, Jean, 1991. "Perfect Bayesian equilibrium and sequential equilibrium," Journal of Economic Theory, Elsevier, Elsevier, vol. 53(2), pages 236-260, April.
  2. Luca Anderlini & Leonardo Felli & Andrew Postlewaite, 2003. "Should courts always enforce what contracting parties write?," LSE Research Online Documents on Economics, London School of Economics and Political Science, LSE Library 3593, London School of Economics and Political Science, LSE Library.
  3. David M Kreps & Robert Wilson, 2003. "Sequential Equilibria," Levine's Working Paper Archive 618897000000000813, David K. Levine.
  4. In-Koo Cho & David M. Kreps, 1997. "Signaling Games and Stable Equilibria," Levine's Working Paper Archive 896, David K. Levine.
  5. Maskin, Eric & Tirole, Jean, 1990. "The Principal-Agent Relationship with an Informed Principal: The Case of Private Values," Econometrica, Econometric Society, Econometric Society, vol. 58(2), pages 379-409, March.
  6. Baliga, Sandeep & Corchon, Luis C. & Sjostrom, Tomas, 1997. "The Theory of Implementation When the Planner Is a Player," Journal of Economic Theory, Elsevier, Elsevier, vol. 77(1), pages 15-33, November.
  7. Moore, John & Repullo, Rafael, 1988. "Subgame Perfect Implementation," Econometrica, Econometric Society, Econometric Society, vol. 56(5), pages 1191-1220, September.
  8. Maskin, Eric & Tirole, Jean, 1992. "The Principal-Agent Relationship with an Informed Principal, II: Common Values," Econometrica, Econometric Society, Econometric Society, vol. 60(1), pages 1-42, January.
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Cited by:
  1. Luca Anderlini & Leonardo Felli & Andrew Postlewaite, 2003. "Should courts always enforce what contracting parties write?," LSE Research Online Documents on Economics, London School of Economics and Political Science, LSE Library 3593, London School of Economics and Political Science, LSE Library.

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