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``The Economics of Agency Law and Contract Formation''


  • Eric Rasmusen

    (Indiana University School of Business)

  • .


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.

Suggested Citation

  • Eric Rasmusen & ., 1995. "``The Economics of Agency Law and Contract Formation''," Law and Economics 9506002, University Library of Munich, Germany.
  • Handle: RePEc:wpa:wuwple:9506002
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    References listed on IDEAS

    1. Kathryn E. Spier, 1992. "Incomplete Contracts and Signalling," RAND Journal of Economics, The RAND Corporation, vol. 23(3), pages 432-443, Autumn.
    2. 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 309-343, June.
    3. Bengt Holmstrom, 1982. "Moral Hazard in Teams," Bell Journal of Economics, The RAND Corporation, vol. 13(2), pages 324-340, Autumn.
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    Cited by:

    1. Caspar Rose, 2010. "The transfer of property rights by theft: an economic analysis," European Journal of Law and Economics, Springer, vol. 30(3), pages 247-266, December.
    2. Alan M. Taylor, 2002. "A Century Of Purchasing-Power Parity," The Review of Economics and Statistics, MIT Press, vol. 84(1), pages 139-150, February.
    3. Raul Green & Michel Hy, 2002. "Internet et chaînes d'approvisionnement agro-alimentaire," Économie rurale, Programme National Persée, vol. 272(1), pages 14-27.
    4. Philip L. Williams & Graeme Woodbridge, 2004. "Antitrust Merger Policy: Lessons from the Australian Experience," NBER Chapters, in: Governance, Regulation, and Privatization in the Asia-Pacific Region, pages 35-72, National Bureau of Economic Research, Inc.

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    JEL classification:

    • K - Law and Economics


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