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Legal Evolution and Contract Evolution under Imperfect Enforcement

Author

Listed:
  • Gennaioli, Nicola
  • Ponzetto, Giacomo AM

Abstract

We model optimal contracts and the evolution of precedents by introducing imperfect enforcement into a standard incomplete contracts setup. We assume that biased trial courts can refuse to verify novel evidence but are bound to respect precedents, namely to verify evidence that other judges verified in past cases. Despite judicial biases, optimal contracts are innovative (contingent on both precedents and novel evidence). Noisy evidence and judicial biases, however, introduce enforcement risk and cause incentives to be low-powered. The use of innovative contracts is key. Their litigation refines the law and makes it more informative, so enforcement improves. As a result, parties can in turn write more complete contracts, which enable higher- powered incentives and improve welfare. This beneficial mechanism is hampered by judicial bias, which slows down legal evolution and causes enforcement risk to persist for a long time.

Suggested Citation

  • Gennaioli, Nicola & Ponzetto, Giacomo AM, 2015. "Legal Evolution and Contract Evolution under Imperfect Enforcement," CEPR Discussion Papers 10700, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:10700
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    References listed on IDEAS

    as
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    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    contracts; imperfect enforcement; legal evolution; precedents;

    JEL classification:

    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
    • K12 - Law and Economics - - Basic Areas of Law - - - Contract Law
    • K40 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior - - - General
    • K41 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior - - - Litigation Process

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