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Contracting in the Presence of Judicial Agency

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  • Bond Philip

    () (University of Pennsylvania)

Abstract

While a key function of contracts is to provide incentives, the incentives of judges to enforce the terms of a contract have rarely been examined. This paper develops a simple model of judicial agency in which judges are corrupt and can be bribed by contracting parties. Higher-powered contracts expose contracting parties to more frequent and more severe corruption, which in turn lessens the incentives actually provided by the contract. Consequently the model predicts that individuals will commonly refrain from writing high-powered contracts, even when such contracts would be valuable absent judicial agency. I show that similar implications can also be obtained by considering other forms of imperfection in contract enforcement, such as variable expenditures on legal representation. I use the model to develop implications for the optimal punishment of individuals who are extorted by corrupt judges, and to establish circumstances under which a right-of-appeal is optimal.

Suggested Citation

  • Bond Philip, 2009. "Contracting in the Presence of Judicial Agency," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 9(1), pages 1-34, November.
  • Handle: RePEc:bpj:bejtec:v:9:y:2009:i:1:n:36
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    References listed on IDEAS

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    1. Milgrom, Paul R, 1988. "Employment Contracts, Influence Activities, and Efficient Organization Design," Journal of Political Economy, University of Chicago Press, vol. 96(1), pages 42-60, February.
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    3. Vai-Lam Mui, 1999. "Contracting in the Shadow of a Corrupt Court," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 155(2), pages 249-249, June.
    4. John Mcmillan & Pablo Zoido, 2004. "How to Subvert Democracy: Montesinos in Peru," Journal of Economic Perspectives, American Economic Association, vol. 18(4), pages 69-92, Fall.
    5. Arun S. Malik, 1990. "Avoidance, Screening and Optimum Enforcement," RAND Journal of Economics, The RAND Corporation, vol. 21(3), pages 341-353, Autumn.
    6. Richard T. Boylan, 2005. "What Do Prosecutors Maximize? Evidence from the Careers of U.S. Attorneys," American Law and Economics Review, Oxford University Press, vol. 7(2), pages 379-402.
    7. Fahad Khalil & Jacques Lawarrée & Sungho Yun, 2007. "Bribery vs. Extortion: Allowing the Lesser of two Evils," CESifo Working Paper Series 1993, CESifo Group Munich.
    8. Bernheim, B Douglas & Whinston, Michael D, 1998. "Incomplete Contracts and Strategic Ambiguity," American Economic Review, American Economic Association, vol. 88(4), pages 902-932, September.
    9. Hart, Oliver, 1995. "Firms, Contracts, and Financial Structure," OUP Catalogue, Oxford University Press, number 9780198288817.
    10. Chris William Sanchirico, 2008. "A Primary-Activity Approach to Proof Burdens," The Journal of Legal Studies, University of Chicago Press, vol. 37(1), pages 273-313, January.
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    Cited by:

    1. Massenot, Baptiste, 2010. "Contract enforcement, litigation, and economic development," MPRA Paper 27501, University Library of Munich, Germany.
    2. Gennaioli, Nicola & Ponzetto, Giacomo AM, 2015. "Legal Evolution and Contract Evolution under Imperfect Enforcement," CEPR Discussion Papers 10700, C.E.P.R. Discussion Papers.
    3. Van Assche, Ari & Schwartz, Galina A., 2013. "Contracting institutions and ownership structure in international joint ventures," Journal of Development Economics, Elsevier, vol. 103(C), pages 124-132.
    4. Nicola Gennaioli & Giacomo A. M. Ponzetto, 2015. "Contract Innovation and Legal Evolution under Imperfect Enforcement," Working Papers 836, Barcelona Graduate School of Economics.

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