Optimal Contracts with Enforcement Risk

Nicola Gennaioli

No 8405, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: I build a model where potentially biased judges verify complex states by interpreting an imperfect signal whose noise captures factual ambiguities. In a sales and a financial transaction I show that judicial biases amplify and distort factual ambiguities, creating enforcement risk. To insure against such risk, parties write simple non-contingent contracts that optimally protect the party that is most vulnerable to judicial error. These results shed light on the empirical association between law and finance and rationalize salient features of real world enforcement regimes.

Keywords: Imperfect judicial enforcement; Optimal contracts (search for similar items in EconPapers)
JEL-codes: K00 (search for similar items in EconPapers)
Date: 2011-05
New Economics Papers: this item is included in nep-bec, nep-cta and nep-law
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Citations: View citations in EconPapers (16)

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Journal Article: OPTIMAL CONTRACTS WITH ENFORCEMENT RISK (2013)
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