``The Economics of Agency Law and Contract Formation''
This article addresses issues that arise in agency law when agents make contracts on behalf of principals. The main issue is whether the principal should be bound when the agent makes a contract with some third party on his behalf which the principal would immediately wish to disavow. The resulting tradeoffs resemble those in tort law, so the least-cost-avoider principle is useful for deciding when contracts are valid and may be the underlying logic behind a number of different legal doctrines applied to agency cases. In particular, an efficiency explanation can be found for the undisclosed principal rule, which says that the principal is generally bound even when the third party is unaware that the agent is acting as an agent for him.
|Date of creation:||14 Jun 1995|
|Date of revision:|
|Note:||An 82KB LaTeX file. A postscript file is available on request from Erasmuse@Indiana.edu.|
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- Bengt Holmstrom, 1981.
"Moral Hazard in Teams,"
471, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
- Rasmusen, Eric & Ayres, Ian, 1993.
"Mutual and Unilateral Mistake in Contract Law,"
The Journal of Legal Studies,
University of Chicago Press, vol. 22(2), pages 309-43, June.
- Kathryn E. Spier, 1992. "Incomplete Contracts and Signalling," RAND Journal of Economics, The RAND Corporation, vol. 23(3), pages 432-443, Autumn.
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