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Courts of Law and Unforeseen Contingencies

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Author Info
Luca Anderlini, Leonardo Felli & Andrew Postlewaite () (Department of Economics, Georgetown University)

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Abstract

We study a contracting model with unforeseen contingencies in which the court is an active player. Ex-ante, the contracting parties cannot include the risky unforeseen contingencies in the contract they draw up. Ex-post the court observes whether an unforeseen contingency occurred, and decides whether to void or uphold the contract. If the contract is voided by the court, the parties can renegotiate a new agreement ex-post. There are two effects of a court that voids more contracts. The parties' incentives to undertake relationship-specific investment are reduced, while the parties enjoy greater insurance against the unforeseen contingencies which the ex-ante contract cannot take into account. In this context, we are able to characterize fully the optimal decision rule for the court. The behavior of the optimal court is determined by the tradeoff between the need for incentives and the gains from insurance that voiding in some circumstances offers to the agents..

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Paper provided by Georgetown University, Department of Economics in its series Working Papers with number gueconwpa~03-03-26.

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Handle: RePEc:geo:guwopa:gueconwpa~03-03-26

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Postal: Georgetown University Department of Economics Washington, DC 20057-1036
Phone: 202-687-6074
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Web page: http://econ.georgetown.edu/

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Related research
Keywords: Optimal Courts; Unforeseen Contingencies; Risk; Incentives;

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Find related papers by JEL classification:
C79 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Other
D74 - Microeconomics - - Analysis of Collective Decision-Making - - - Conflict; Conflict Resolution; Alliances
D89 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Other
K40 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior - - - General
L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

  1. Segal, Ilya, 1999. "Complexity and Renegotiation: A Foundation for Incomplete Contracts," Review of Economic Studies, Blackwell Publishing, vol. 66(1), pages 57-82, January. [Downloadable!] (restricted)
  2. Nabil J Al-Najjar & Luca Anderlini & Leonardo Felli, 2002. "Unforeseen Contingencies," STICERD - Theoretical Economics Paper Series 431, Suntory and Toyota International Centres for Economics and Related Disciplines, LSE. [Downloadable!]
    Other versions:
  3. Nabil I. Al-Najjar & Luca Anderlini & Leonardo Felli, 2003. "Undescribable Events," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
    Other versions:
  4. Bernheim, B Douglas & Whinston, Michael D, 1998. "Incomplete Contracts and Strategic Ambiguity," American Economic Review, American Economic Association, vol. 88(4), pages 902-32, September. [Downloadable!] (restricted)
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  5. Raghuram G. Rajan & Luigi Zingales, 1998. "Power In A Theory Of The Firm," The Quarterly Journal of Economics, MIT Press, vol. 113(2), pages 387-432, May. [Downloadable!] (restricted)
    Other versions:
  6. Aghion, Philippe & Tirole, Jean, 1997. "Formal and Real Authority in Organizations," Journal of Political Economy, University of Chicago Press, vol. 105(1), pages 1-29, February.
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  7. Dekel, Eddie & Lipman, Barton L. & Rustichini, Aldo, 1998. "Recent developments in modeling unforeseen contingencies," European Economic Review, Elsevier, vol. 42(3-5), pages 523-542, May. [Downloadable!] (restricted)
  8. Alan Schwartz & Joel Watson, 2000. "Economic and Legal Aspects of Costly Recontracting," University of California at San Diego, Economics Working Paper Series 2000-05, Department of Economics, UC San Diego. [Downloadable!]
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  9. Louis Kaplow & Steven Shavell, 1999. "Economic Analysis of Law," NBER Working Papers 6960, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  10. Grossman, Sanford J & Hart, Oliver D, 1986. "The Costs and Benefits of Ownership: A Theory of Vertical and Lateral Integration," Journal of Political Economy, University of Chicago Press, vol. 94(4), pages 691-719, August. [Downloadable!] (restricted)
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  11. Alan Schwartz, 2004. "The Law and Economics of Costly Contracting," Journal of Law, Economics and Organization, Oxford University Press, vol. 20(1), pages 2-31, April.
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  12. 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. [Downloadable!]
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  13. Jean Tirole, 1999. "Incomplete Contracts: Where Do We Stand?," Econometrica, Econometric Society, vol. 67(4), pages 741-782, July.
Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. J. Luis Guasch & Jean-Jacques Laffont & Stephane Straub, 2004. "Renegotiation of Concession Contracts in Latin America," ESE Discussion Papers 103, Edinburgh School of Economics, University of Edinburgh. [Downloadable!]
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  2. Dana Heller & Ran Spiegler, 2005. "Contradiction as a Form of Contractual Incompleteness," Levine's Bibliography 122247000000000978, UCLA Department of Economics. [Downloadable!]
  3. Nabil Al-Najjar & Luca Anderlini & Leonardo Felli, 2003. "Undescribable Contingencies," Discussion Papers 1370, Northwestern University, Center for Mathematical Studies in Economics and Management Science. [Downloadable!]
  4. Neil A. Doherty & Alexander Muermann, 2005. "Insuring the Uninsurable: Brokers and Incomplete Insurance Contracts," CFS Working Paper Series 2005/24, Center for Financial Studies. [Downloadable!]
  5. Mitchell Berlin & Yaron Leitner, 2005. "Courts and contractual innovation: a preliminary analysis," Working Papers 05-27, Federal Reserve Bank of Philadelphia. [Downloadable!]
  6. C. Manuel Willington, 2004. "Hold-Up under Costly Litigation and Imperfect Courts of Law," Econometric Society 2004 Latin American Meetings 231, Econometric Society. [Downloadable!]
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  7. Joel Watson, 2002. "Contract, Mechanism Design, and Technological Detail," Theory workshop papers 505798000000000006, UCLA Department of Economics. [Downloadable!]
    Other versions:
  8. Chiara D'Alpaos & Michele Moretto & Paola Valbonesi, 2008. "Optimal penalty for investment delay in public procurement contracts," "Marco Fanno" Working Papers 0074, Dipartimento di Scienze Economiche "Marco Fanno". [Downloadable!]
  9. Anderlini, Luca & Felli, Leonardo & Postlewaite, Andrew, 2004. "Should Courts Always Enforce What Contracting Parties Write?," CEPR Discussion Papers 4197, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  10. Shurojit Chatterji & Dragan Filipovich, 2004. "Ambiguous Contracting: Natural Language and Judicial Interpretation," Econometric Society 2004 North American Winter Meetings 419, Econometric Society. [Downloadable!]
  11. Steven Shavell, 2003. "On the Writing and the Interpretation of Contracts," NBER Working Papers 10094, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  12. Etienne Pfister & Bruno Deffains & Myriam Doriat-Duban & Stéphane Saussier, 2006. "Institutions and contracts: Franchising," European Journal of Law and Economics, Springer, vol. 21(1), pages 53-78, January. [Downloadable!] (restricted)
  13. Giovanni Maggi & Robert W. Staiger, 2008. "On the Role and Design of Dispute Settlement Procedures in International Trade Agreements," NBER Working Papers 14067, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  14. Joel Watson, 2006. "Contract, Mechanism Design, and Technological Detail," University of California at San Diego, Economics Working Paper Series 2002-04R, Department of Economics, UC San Diego. [Downloadable!]
  15. Yaron Leitner, 2005. "Legal uncertainty and contractual innovation," Business Review, Federal Reserve Bank of Philadelphia, issue Q2, pages 26-32. [Downloadable!]
  16. Iossa, Elisabetta & Jullien, Bruno, 2007. "The Market for Lawyers: The Value of Information on the Quality of Legal Services," IDEI Working Papers 485, Institut d'Économie Industrielle (IDEI), Toulouse. [Downloadable!]
  17. Alan Schwartz & Joel Watson, . "The Law and Economics of Costly Contracting," Yale Law School John M. Olin Center for Studies in Law, Economics, and Public Policy Working Paper Series yale_lepp-1004, Yale Law School John M. Olin Center for Studies in Law, Economics, and Public Policy. [Downloadable!]
    Other versions:
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