Advanced Search
MyIDEAS: Login to save this paper or follow this series

Should Courts Always Enforce What Contracting Parties Write?

Contents:

Author Info

  • Luca Anderlini

    ()
    (Department of Economics, Georgetown University)

  • Leonardo Felli

    ()
    (Department of Economics, London School of Economics and Political Science)

  • Andrew Postlewaite

    ()
    (Department of Economics, University of Pennsylvania)

Abstract

We find an economic rationale for the common sense answer to the question in our title - courts should not always enforce what the contracting parties write. We describe and analyze a contractual environment that allows a role for an active court. 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. We study a buyer-seller model with risk-neutral agents and asymmetric information. The court must decide when to uphold a contract and when to void it. The parties know their private information at the time of contracting, and this drives a wedge between ex-ante and interim-efficient contracts. In particular, if the court enforces all contracts, inefficient pooling obtains in equilibrium. By voiding some contracts the court is able to induce them to separate, and hence improve ex-ante welfare.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://economics.sas.upenn.edu/system/files/working-papers/09-004.pdf
Download Restriction: no

Bibliographic Info

Paper provided by Penn Institute for Economic Research, Department of Economics, University of Pennsylvania in its series PIER Working Paper Archive with number 09-004.

as in new window
Length: 16 pages
Date of creation: 23 Jan 2009
Date of revision:
Handle: RePEc:pen:papers:09-004

Contact details of provider:
Postal: 3718 Locust Walk, Philadelphia, PA 19104
Phone: 215-898-9992
Fax: 215-573-2378
Email:
Web page: http://economics.sas.upenn.edu/pier
More information through EDIRC

Related research

Keywords: Optimal Courts; Informational Externalities; Ex-Ante Welfare;

Other versions of this item:

Find related papers by JEL classification:

This paper has been announced in the following NEP Reports:

References

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.:
as in new window
  1. Luca Anderlini & Leonardo Felli & Andrew Postlewaite, 2006. "Active Courts and Menu Contracts," Working Papers, Georgetown University, Department of Economics gueconwpa~06-06-08, Georgetown University, Department of Economics.
  2. Luca Anderlini, Leonardo Felli & Andrew Postlewaite, 2003. "Courts of Law and Unforeseen Contingencies," Working Papers, Georgetown University, Department of Economics gueconwpa~03-03-26, Georgetown University, Department of Economics.
  3. Leonardo Felli & Alessandro Riboni & Luca Anderlini, 2007. "Statute Law or Case Law?," 2007 Meeting Papers, Society for Economic Dynamics 952, Society for Economic Dynamics.
  4. Kreps, David M & Wilson, Robert, 1982. "Sequential Equilibria," Econometrica, Econometric Society, Econometric Society, vol. 50(4), pages 863-94, July.
  5. Baliga, Sandeep & Corchon, Luis C. & Sjostrom, Tomas, 1997. "The Theory of Implementation When the Planner Is a Player," Journal of Economic Theory, Elsevier, vol. 77(1), pages 15-33, November.
  6. Luca Anderlini & Leonardo Felli & Andrew Postlewaite, 2003. "Should courts always enforce what contracting parties write?," LSE Research Online Documents on Economics 3593, London School of Economics and Political Science, LSE Library.
  7. Philippe Aghion and Benjamin Hermalin., 1990. "Why Legal Restrictions on Private Contracts Can Enhance Efficiency," Economics Working Papers, University of California at Berkeley 90-140, University of California at Berkeley.
  8. Cho, In-Koo & Kreps, David M, 1987. "Signaling Games and Stable Equilibria," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 102(2), pages 179-221, May.
  9. Levy, Gilat, 2003. "Careerist Judges," CEPR Discussion Papers 3948, C.E.P.R. Discussion Papers.
  10. Steven Shavell, 2006. "On the Writing and the Interpretation of Contracts," Journal of Law, Economics and Organization, Oxford University Press, Oxford University Press, vol. 22(2), pages 289-314, October.
  11. Eric Maskin, 2006. "On the Rationale for Penalty Default Rules," Economics Working Papers 0058, Institute for Advanced Study, School of Social Science.
  12. 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.
  13. Mailath George J. & Okuno-Fujiwara Masahiro & Postlewaite Andrew, 1993. "Belief-Based Refinements in Signalling Games," Journal of Economic Theory, Elsevier, vol. 60(2), pages 241-276, August.
  14. 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.
  15. Steven Shavell, 2003. "On the Writing and the Interpretation of Contracts," NBER Working Papers 10094, National Bureau of Economic Research, Inc.
  16. Lucian Arye Bebchuk & Steven Shavell, 1991. "Information and the Scope of Liability for Breach of Contract: The Rule of Hadley V. Baxendale," NBER Working Papers 3696, National Bureau of Economic Research, Inc.
  17. Murat Usman, 2002. "Verifiability and Contract Enforcement: A Model with Judicial Moral Hazard," Journal of Law, Economics and Organization, Oxford University Press, Oxford University Press, vol. 18(1), pages 67-94, April.
  18. Aghion, Philippe & Hermalin, Benjamin, 1990. "Legal Restrictions on Private Contracts Can Enhance Efficiency," Journal of Law, Economics and Organization, Oxford University Press, Oxford University Press, vol. 6(2), pages 381-409, Fall.
  19. Alan Schwartz & Robert Scott, . "Contract Theory and the Limits of Contract Law," Yale Law School John M. Olin Center for Studies in Law, Economics, and Public Policy Working Paper Series, Yale Law School John M. Olin Center for Studies in Law, Economics, and Public Policy yale_lepp-1011, Yale Law School John M. Olin Center for Studies in Law, Economics, and Public Policy.
  20. 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.
  21. Kathryn E. Spier, 1992. "Incomplete Contracts and Signalling," RAND Journal of Economics, The RAND Corporation, vol. 23(3), pages 432-443, Autumn.
  22. Fudenberg, Drew & Tirole, Jean, 1991. "Perfect Bayesian equilibrium and sequential equilibrium," Journal of Economic Theory, Elsevier, vol. 53(2), pages 236-260, April.
  23. Elisabetta Iossa & Giuliana Palumbo, 2002. "Decision Rules and Information Provision:Monitoring versus Manipulation," Economics and Finance Discussion Papers 02-17, Economics and Finance Section, School of Social Sciences, Brunel University.
  24. Moore, John & Repullo, Rafael, 1988. "Subgame Perfect Implementation," Econometrica, Econometric Society, Econometric Society, vol. 56(5), pages 1191-1220, September.
  25. Adler, Barry E., 1999. "The Questionable Ascent of Hadley v. Baxendale," Berkeley Olin Program in Law & Economics, Working Paper Series, Berkeley Olin Program in Law & Economics qt3wh5v8j9, Berkeley Olin Program in Law & Economics.
Full references (including those not matched with items on IDEAS)

Citations

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
This item has more than 25 citations. To prevent cluttering this page, these citations are listed on a separate page.

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:pen:papers:09-004. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Dolly Guarini).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.