IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Login to save this paper

Should Courts Always Enforce What Contracting Parties Write?

We find an economic rationale for the common sense answer to the question in our title -- courts should not always enforce what the contracting parties write. We describe and analyze a contractual environment that allows a role for an active court. An active court can improve on the outcome that the parties would achieve without it. The institutional role of the court is to maximize the parties' welfare under a veil of ignorance. We study a buyer-seller multiple-widget model with risk-neutral agents, asymmetric information and ex-ante investments. The court must decide when to uphold a contract and when to void it. The parties know their private information at the time of contracting, and this drives a wedge between ex-ante and interim-efficient contracts. In particular, if the court enforces all contracts, pooling obtains in equilibrium. By voiding some contracts the court is able to induce them to separate, and hence improve ex-ante welfare. In some cases, an ambiguous court that voids and upholds both with positive probability may be able to increase welfare even further.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL: http://www8.georgetown.edu/departments/economics/pdf/607.pdf
File Function: Full text
Download Restriction: None

Paper provided by Georgetown University, Department of Economics in its series Working Papers with number gueconwpa~06-06-07.

as
in new window

Length:
Date of creation: 07 Jun 2006
Date of revision:
Handle: RePEc:geo:guwopa:gueconwpa~06-06-07
Contact details of provider: Postal:
Georgetown University Department of Economics Washington, DC 20057-1036

Phone: 202-687-6074
Fax: 202-687-6102
Web page: http://econ.georgetown.edu/
Email:

Order Information: Postal: Roger Lagunoff Professor of Economics Georgetown University Department of Economics Washington, DC 20057-1036
Web: http://econ.georgetown.edu/ Email:


References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

as in new window
  1. David Kreps & Robert Wilson, 1998. "Sequential Equilibria," Levine's Working Paper Archive 237, David K. Levine.
  2. Luca Anderlini & Leonardo Felli & Andrew Postlewaite, 2006. "Should Courts Always Enforce What Contracting Parties Write?," Working Papers gueconwpa~06-06-07, Georgetown University, Department of Economics.
  3. Elisabetta Iossa & Giuliana Palumbo, 2002. "Decision Rules and Information Provision:Monitoring versus Manipulation," Public Policy Discussion Papers 02-17, Economics and Finance Section, School of Social Sciences, Brunel University.
  4. Anderlini, Luca & Felli, Leonardo & Postlewaite, Andrew, 2001. "Courts of Law and Unforeseen Contingencies," CEPR Discussion Papers 2835, C.E.P.R. Discussion Papers.
  5. Murat Usman, 2002. "Verifiability and Contract Enforcement: A Model with Judicial Moral Hazard," Journal of Law, Economics and Organization, Oxford University Press, vol. 18(1), pages 67-94, April.
  6. Levy, Gilat, 2003. "Careerist Judges," CEPR Discussion Papers 3948, C.E.P.R. Discussion Papers.
  7. In-Koo Cho & David M. Kreps, 1987. "Signaling Games and Stable Equilibria," The Quarterly Journal of Economics, Oxford University Press, vol. 102(2), pages 179-221.
  8. Baliga, Sandeep & Corchon, Luis C. & Sjostrom, Tomas, 1997. "The Theory of Implementation When the Planner Is a Player," Journal of Economic Theory, Elsevier, vol. 77(1), pages 15-33, November.
  9. Aghion, Philippe & Hermalin, Benjamin, 1990. "Why Legal Restrictions on Private Contracts Can Enhance Efficiency," Department of Economics, Working Paper Series qt4j76f10g, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
  10. Luca Anderlini & Leonardo Felli & Alessandro Riboni, 2008. "Statute Law or Case Law?," STICERD - Theoretical Economics Paper Series 528, Suntory and Toyota International Centres for Economics and Related Disciplines, LSE.
  11. Luca Anderlini & Leonardo Felli & Andrew Postlewaite, 2006. "Active Courts and Menu Contracts," STICERD - Theoretical Economics Paper Series 511, Suntory and Toyota International Centres for Economics and Related Disciplines, LSE.
    • Luca Anderlini & Leonardo Felli & Andrew Postlewaite, 2013. "Active courts and menu contracts," Chapters, in: Research Handbook on Economic Models of Law, chapter 13, pages 281-307 Edward Elgar Publishing.
  12. Aghion, P. & Hermalin, B., 1990. "Legal Restrictions on Private Contracts Can Enhance Efficiency," DELTA Working Papers 90-14, DELTA (Ecole normale supérieure).
  13. Bebchuk, Lucian Ayre & Shavell, Steven, 1991. "Information and the Scope of Liability for Breach of Contract: The Rule of Hadley vs. Baxendale," Journal of Law, Economics and Organization, Oxford University Press, vol. 7(2), pages 284-312, Fall.
  14. Eric Maskin, 2006. "On the Rationale for Penalty Default Rules," Economics Working Papers 0058, Institute for Advanced Study, School of Social Science.
  15. B. Douglas Bernheim & Michael D. Whinston, 1997. "Incomplete Contracts and Strategic Ambiguity," Harvard Institute of Economic Research Working Papers 1787, Harvard - Institute of Economic Research.
  16. Fudenberg, Drew & Tirole, Jean, 1991. "Perfect Bayesian equilibrium and sequential equilibrium," Journal of Economic Theory, Elsevier, vol. 53(2), pages 236-260, April.
  17. Moore, John & Repullo, Rafael, 1988. "Subgame Perfect Implementation," Econometrica, Econometric Society, vol. 56(5), pages 1191-1220, September.
  18. Maskin, Eric & Tirole, Jean, 1990. "The Principal-Agent Relationship with an Informed Principal: The Case of Private Values," Econometrica, Econometric Society, vol. 58(2), pages 379-409, March.
  19. 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.
  20. Adler, Barry E., 1999. "The Questionable Ascent of Hadley v. Baxendale," Berkeley Olin Program in Law & Economics, Working Paper Series qt3wh5v8j9, Berkeley Olin Program in Law & Economics.
  21. Mailath George J. & Okuno-Fujiwara Masahiro & Postlewaite Andrew, 1993. "Belief-Based Refinements in Signalling Games," Journal of Economic Theory, Elsevier, vol. 60(2), pages 241-276, August.
  22. Steven Shavell, 2003. "On the Writing and the Interpretation of Contracts," NBER Working Papers 10094, National Bureau of Economic Research, Inc.
  23. Alan Schwartz & Robert Scott, . "Contract Theory and the Limits of Contract Law," Yale Law School John M. Olin Center for Studies in Law, Economics, and Public Policy Working Paper Series yale_lepp-1011, Yale Law School John M. Olin Center for Studies in Law, Economics, and Public Policy.
  24. Kathryn E. Spier, 1992. "Incomplete Contracts and Signalling," RAND Journal of Economics, The RAND Corporation, vol. 23(3), pages 432-443, Autumn.
  25. Maskin, Eric & Tirole, Jean, 1992. "The Principal-Agent Relationship with an Informed Principal, II: Common Values," Econometrica, Econometric Society, vol. 60(1), pages 1-42, January.
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:geo:guwopa:gueconwpa~06-06-07. 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: (Marcia Suss)

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 references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link 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 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.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.