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Interpreting contracts: the purposive approach and non-comprehensive incentive contracts

Author

Listed:
  • Benjamin Bental
  • Bruno Deffains

    (CRED - Centre de Recherche en Economie et Droit - UP2 - Université Panthéon-Assas)

  • Dominique Demougin

    (EBS Paris - European Business School Paris)

Abstract

Real world contracts often contain incentive clauses that fail to fully specify conditions triggering payments, giving rise to legal disputes. When complete contract generate Pareto efficient allocations the L&E literature advocates that courts should fill in the missing clauses. This logic does not directly extend to environments with moral hazard, where complete contracts result in constrained efficient allocations. Despite this inefficiency we find that when agency and marginal agency costs are congruent, the legal system can do no better than guide its courts to complete contracts according to the parties’ intentions.
(This abstract was borrowed from another version of this item.)

Suggested Citation

  • Benjamin Bental & Bruno Deffains & Dominique Demougin, 2020. "Interpreting contracts: the purposive approach and non-comprehensive incentive contracts," Post-Print hal-04129352, HAL.
    • Handle: RePEc:hal:journl:hal-04129352
    DOI: 10.1007/s10657-020-09667-1
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    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
    • K40 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior - - - General

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