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Active Courts and Menu Contracts

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Abstract

We describe and analyze a contractual environment that allows a role for an active court. The model we analyze is the same as in Anderlini, Felli, and Postlewaite (2006). 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. In Anderlini, Felli, and Postlewaite (2006) the possibility of "menu contracts" between the informed buyer and the uninformed seller is described but not analyzed. Here, we fully analyze this case. We find that if we maintain the assumption that one of the potential objects of trade is not contractible ex-ante, the results of Anderlini, Felli, and Postlewaite (2006) survive intact. If however we let all "widgets" be contractible ex-ante, then multiple equilibria obtain. In this case the role for an active court is to ensure the inefficient pooling equilibria do not exist alongside the superior ones in which separation occurs.

Suggested Citation

  • Luca Anderlini & Leonardo Felli & Andrew Postlewaite, 2006. "Active Courts and Menu Contracts," Working Papers gueconwpa~06-06-08, Georgetown University, Department of Economics.
  • Handle: RePEc:geo:guwopa:gueconwpa~06-06-08
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    File URL: http://www8.georgetown.edu/departments/economics/pdf/608.pdf
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    Other versions of this item:

    • 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.

    References listed on IDEAS

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    1. Fudenberg, Drew & Tirole, Jean, 1991. "Perfect Bayesian equilibrium and sequential equilibrium," Journal of Economic Theory, Elsevier, vol. 53(2), pages 236-260, April.
    2. Kreps, David M & Wilson, Robert, 1982. "Sequential Equilibria," Econometrica, Econometric Society, vol. 50(4), pages 863-894, July.
    3. Moore, John & Repullo, Rafael, 1988. "Subgame Perfect Implementation," Econometrica, Econometric Society, vol. 56(5), pages 1191-1220, September.
    4. 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.
    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. 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.
    7. 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.
    8. 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.
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    Cited by:

    1. 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.

    More about this item

    Keywords

    Optimal Courts; Informational Externalities; Ex-ante Welfare; Informed Principal; Menu Contracts.;

    JEL classification:

    • C79 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Other
    • D74 - Microeconomics - - Analysis of Collective Decision-Making - - - Conflict; Conflict Resolution; Alliances; Revolutions
    • D89 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Other
    • K40 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior - - - General
    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation

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