Legal Environment and Contractual Choice

Cheng Ho Cheung ()
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Cheng Ho Cheung: Department of Economics, National Central University, No. 300, Zhongda Road, Zhongli City, Taoyuan County 32001, Taiwan

The B.E. Journal of Theoretical Economics, 2022, vol. 22, issue 2, 557-577

Abstract: This paper considers contractual choice under imperfect legal systems, in particular, contracts with different timing of payment. Ex-ante payment contracts are risky for the buyer, because the seller may shirk. Ex-post payment contracts are risky for the seller, as the buyer may default. Optimal contract is solved for any given legal environment. Exchanges with lower gains from trade tend to adopt ex-post payment contracts. The seller is a better proposer than the buyer in terms of the efficiency of the proposed contract. Surprisingly, offering ex-ante payment contracts is not strictly better for the seller under any legal environment. Moreover, mixed payment contracts are also analyzed and shown to never be optimal.

Keywords: contract; 2 sided moral hazard; imperfect court; timing of payment (search for similar items in EconPapers)
JEL-codes: D86 K12 K41 (search for similar items in EconPapers)
Date: 2022
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DOI: 10.1515/bejte-2020-0098

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