Optimally Vague Contracts and the Law

Nicola Gennaioli and Giacomo Ponzetto
Authors registered in the RePEc Author Service: Enrico Perotti

No 747, Working Papers from Barcelona School of Economics

Abstract: Many real-world contracts contain vague clauses despite the enforcement risk they en- tail. To study the causes and consequences of this phenomenon, we build a principal-agent model in which contracts can include vague clauses whose enforcement may be distorted by opportunistic litigants and biased judges. We find three results. First, the optimal contract is vague, even if courts are very imperfect. Second, the use of vague clauses is a public good: it promotes the evolution of precedents, so future contracts become more complete, incentives higher powered, and surplus larger. Third, as precedents evolve, vague contracts spread from sophisticated to unsophisticated parties, expanding market size. Our model sheds light on the evolution and diffusion of business-format franchising and equity finance

Keywords: contracts; legal evolution; precedents; optimal contracts; contract enforcement (search for similar items in EconPapers)
JEL-codes: D86 K12 K40 (search for similar items in EconPapers)
Date: 2015-09
New Economics Papers: this item is included in nep-law and nep-mic
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://bw.bse.eu/wp-content/uploads/2015/09/747-file.pdf (application/pdf)

Related works:
Working Paper: Optimally Vague Contracts and the Law (2017)
Working Paper: Optimally vague contracts and the law (2017)
Working Paper: Optimally Vague Contracts and the Law (2015)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:bge:wpaper:747

Access Statistics for this paper

More papers in Working Papers from Barcelona School of Economics Contact information at EDIRC.
Bibliographic data for series maintained by Bruno Guallar ().