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Verifiability and Contract Enforcement: A Model with Judicial Moral Hazard

  • Murat Usman

I model the litigation of a contract containing a variable not observable by courts, hence nonverifiable, unless the rational and self-interested judge exerts effort. He values the correct ruling but dislikes effort. Judicial effort is discretionary. I show that effort cost is inconsequential--"always breach" is equilibrium for any effort cost. But there exists another equilibrium where a small breach rate is achieved even with significant effort costs. Maximal remedies for breach are not optimal. Because effort is discretionary, low effort cost increases breach. Pretrial negotiations can have a substantial negative impact on verifiability under arbitrarily small deviations from full rationality. Copyright 2002, Oxford University Press.

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Article provided by Oxford University Press in its journal Journal of Law, Economics, and Organization.

Volume (Year): 18 (2002)
Issue (Month): 1 (April)
Pages: 67-94

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Handle: RePEc:oup:jleorg:v:18:y:2002:i:1:p:67-94
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