Interpreting contracts: the purposive approach and non-comprehensive incentive contracts

Benjamin Bental, Bruno Deffains () and Dominique Demougin ()
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Benjamin Bental: University of Haifa
Bruno Deffains: University Paris 2, Pantheon Assas

European Journal of Law and Economics, 2020, vol. 50, issue 2, No 3, 265 pages

Abstract: Abstract Real world contracts often contain incentive clauses that fail to fully specify conditions triggering payments, giving rise to legal disputes. When complete contract generate Pareto efficient allocations the L&E literature advocates that courts should fill in the missing clauses. This logic does not directly extend to environments with moral hazard, where complete contracts result in constrained efficient allocations. Despite this inefficiency we find that when agency and marginal agency costs are congruent, the legal system can do no better than guide its courts to complete contracts according to the parties’ intentions.

Keywords: Asymmetric information; Balance of probabilities; Incomplete contracts; Judicial system; Courts (search for similar items in EconPapers)
JEL-codes: D82 D86 K40 (search for similar items in EconPapers)
Date: 2020
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DOI: 10.1007/s10657-020-09667-1

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