IDEAS home Printed from https://ideas.repec.org/p/fip/fedpwp/05-27.html
   My bibliography  Save this paper

Courts and contractual innovation: a preliminary analysis

Author

Listed:
  • Mitchell Berlin
  • Yaron Leitner

Abstract

The authors explore a model in which agents enter into a contract but are uncertain about how a judge will enforce it. The judge can consider a wide range of evidence, or instead, use a rule-based method of judgment that relies on limited information. The authors focus on the following tradeoff: Considering a wide range of evidence increases the likelihood of a correct ruling in the case at hand but undermines the formation of precedents that resolve legal uncertainty for subsequent agents. ; In a model of contractual innovation, they show that the use of evidence increases the likelihood of innovation in any period, while rule-driven judgments increase the rate of diffusion of the innovation. When courts can use a mixture of evidence and rules, the minimum amount of evidence that induces adoption is (weakly) decreasing over time. They also examine the breadth of precedents. Overlapping jurisdictions reduce the optimal breadth of precedents because broad precedents are more likely to introduce conflict. Accordingly, overlapping jurisdictions increase the value of using evidence. The authors use their model to interpret differences between the legal systems in the U.S. and England.

Suggested Citation

  • Mitchell Berlin & Yaron Leitner, 2005. "Courts and contractual innovation: a preliminary analysis," Working Papers 05-27, Federal Reserve Bank of Philadelphia, revised 01 Dec 2005.
  • Handle: RePEc:fip:fedpwp:05-27
    as

    Download full text from publisher

    File URL: https://www.philadelphiafed.org/-/media/research-and-data/publications/working-papers/2005/wp05-27r.pdf?la=en
    File Function: Full text
    Download Restriction: no

    References listed on IDEAS

    as
    1. Rafael La Porta & Florencio Lopez-de-Silanes & Andrei Shleifer & Robert W. Vishny, 1998. "Law and Finance," Journal of Political Economy, University of Chicago Press, vol. 106(6), pages 1113-1155, December.
    2. La Porta, Rafael & Florencio Lopez-de-Silanes & Andrei Shleifer & Robert W. Vishny, 1997. " Legal Determinants of External Finance," Journal of Finance, American Finance Association, vol. 52(3), pages 1131-1150, July.
    3. A. Mitchell Polinsky & Steven Shavell, 2005. "Economic Analysis of Law," Discussion Papers 05-005, Stanford Institute for Economic Policy Research.
    4. Shurojit Chatterji & Dragan Filipovich, 2004. "Ambiguous Contracting: Natural Language and Judicial Interpretation," Econometric Society 2004 North American Winter Meetings 419, Econometric Society.
    5. 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.
    6. Steven Shavell, 2003. "On the Writing and the Interpretation of Contracts," NBER Working Papers 10094, National Bureau of Economic Research, Inc.
    7. Andrew Postlewaite, 2007. "Courts of Law and Unforeseen Contingencies," Journal of Law, Economics, and Organization, Oxford University Press, vol. 23(3), pages 662-684, October.
    8. Franks, Julian & Sussman, Oren, 2005. "Financial innovations and corporate bankruptcy," Journal of Financial Intermediation, Elsevier, vol. 14(3), pages 283-317, July.
    9. Ross Levine, 2005. "Law, Endowments and Property Rights," Journal of Economic Perspectives, American Economic Association, vol. 19(3), pages 61-88, Summer.
    10. Kamma, Sreenivas & Weintrop, Joseph & Wier, Peggy, 1988. "Investors' perceptions of the Delaware Supreme Court decision in Unocal v. Mesa," Journal of Financial Economics, Elsevier, vol. 20(1-2), pages 419-430, January.
    11. repec:hrv:faseco:30728041 is not listed on IDEAS
    12. Nicola Gennaioli & Andrei Shleifer, 2005. "The Evolution of Precedent," NBER Working Papers 11265, National Bureau of Economic Research, Inc.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    Contracts;

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:fip:fedpwp:05-27. 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: (Beth Paul). General contact details of provider: http://edirc.repec.org/data/frbphus.html .

    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 CitEc recognized a reference but did not link an item in RePEc 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 RePEc Author Service 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.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.