Contract Innovation and Legal Evolution under Imperfect Enforcement

Nicola Gennaioli and Giacomo Ponzetto

No 836, Working Papers from Barcelona School of Economics

Abstract: We model the joint evolution of contracts and precedents by introducing imperfect enforcement into a standard incomplete contracts setup. We assume that biased trial courts can refuse to verify novel evidence but are bound to respect precedents, namely to verify evidence that other judges verified in past cases. We find that optimal contracts are innovative (contingent on both precedents and novel evidence), but noisy evidence and judicial biases introduce enforcement risk and cause incentives to be low-powered. Litigation of innovative contracts refines the law, making it more informative. This evolution improves enforcement and makes contracts more complete, thereby enabling higher-powered incentives and improving welfare. This beneficial mechanism is hampered by judicial bias, which slows down legal evolution and causes enforcement risk to persist for a long time.

Keywords: contracts; imperfect enforcement; legal evolution; precedents (search for similar items in EconPapers)
JEL-codes: D86 K12 K40 K41 (search for similar items in EconPapers)
Date: 2015-09
New Economics Papers: this item is included in nep-cta and nep-mic
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
https://bw.bse.eu/wp-content/uploads/2015/09/836-file.pdf (application/pdf)

Related works:
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:836

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 (bruno.guallar@bse.eu).