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

Listed author(s):
  • 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.

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Paper provided by EconWPA in its series Law and Economics with number 9506002.

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Date of creation: 14 Jun 1995
Handle: RePEc:wpa:wuwple:9506002
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  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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