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On the Writing and the Interpretation of Contracts

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  • Steven Shavell

Abstract

The major theme of this article is that the interpretation of contracts is in the interests of contracting parties. The general reasons are (a) that interpretation may improve on otherwise imperfect contracts; and (b) that the prospect of interpretation allows parties to write simpler contracts and thus to conserve on contracting effort. A method of interpretation is defined as a function whose argument is the written contract and whose value is another contract, the interpreted contract, which is what actually governs the parties' joint enterprise. It is shown that interpretation is superior to enforcement of contracts as written, and the optimal method of interpretation is analyzed. Copyright 2006, Oxford University Press.

Suggested Citation

  • Steven Shavell, 2006. "On the Writing and the Interpretation of Contracts," Journal of Law, Economics, and Organization, Oxford University Press, vol. 22(2), pages 289-314, October.
  • Handle: RePEc:oup:jleorg:v:22:y:2006:i:2:p:289-314
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    File URL: http://hdl.handle.net/10.1093/jleo/ewj017
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    Citations

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    Cited by:

    1. Ola Kvaløy & Trond E. Olsen, 2009. "Endogenous Verifiability and Relational Contracting," American Economic Review, American Economic Association, vol. 99(5), pages 2193-2208, December.
    2. Yair Listokin, 2010. "Bayesian Contractual Interpretation," The Journal of Legal Studies, University of Chicago Press, vol. 39(2), pages 359-374.
    3. Anderlini Luca & Felli Leonardo & Postlewaite Andrew, 2011. "Should Courts Always Enforce What Contracting Parties Write?," Review of Law & Economics, De Gruyter, vol. 7(1), pages 14-28, February.
    4. Kvaløy, Ola & Olsen, Trond E., 2015. "The tenuous relationship between effort and performance pay," Journal of Public Economics, Elsevier, vol. 121(C), pages 32-39.
    5. A. Mitchell Polinsky & Steven Shavell, 2005. "Economic Analysis of Law," Discussion Papers 05-005, Stanford Institute for Economic Policy Research.
    6. Nicola Gennaioli & Giacomo A. M. Ponzetto, 2015. "Optimally vague contracts and the law," Economics Working Papers 1410, Department of Economics and Business, Universitat Pompeu Fabra, revised Jan 2017.
    7. Ola Kvaløy & Trond E. Olsen, 2016. "Incentive Provision when Contracting is Costly," Economica, London School of Economics and Political Science, vol. 83(332), pages 741-767, October.
    8. Robin Christmann, 2014. "No Judge, No Job! Court errors and the contingent labor contract," European Journal of Law and Economics, Springer, vol. 38(3), pages 409-429, December.
    9. Anderlini, Luca & Postlewaite, Andrew & Felli, Leonardo, 2006. "Should courts always enforce what contracting parties write? this paper replaces TE/2003/464," LSE Research Online Documents on Economics 58189, London School of Economics and Political Science, LSE Library.
    10. Marian Moszoro & Pablo T. Spiller & Sebastian Stolorz, 2015. "Rigidity of Public Contracts," NBER Working Papers 21186, National Bureau of Economic Research, Inc.

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