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Courts of Law and Unforeseen Contingencies

Luca Anderlini, Leonardo Felli & Andrew Postlewaite ()
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Luca Anderlini, Leonardo Felli & Andrew Postlewaite: Department of Economics, Georgetown University, http://www9.georgetown.edu/faculty/la2/

Authors registered in the RePEc Author Service: Luca Anderlini, Leonardo Felli () and Andrew Postlewaite ()

Working Papers from Georgetown University, Department of Economics

Abstract: We study a contracting model with unforeseen contingencies in which the court is an active player. Ex-ante, the contracting parties cannot include the risky unforeseen contingencies in the contract they draw up. Ex-post the court observes whether an unforeseen contingency occurred, and decides whether to void or uphold the contract. If the contract is voided by the court, the parties can renegotiate a new agreement ex-post. There are two effects of a court that voids more contracts. The parties' incentives to undertake relationship-specific investment are reduced, while the parties enjoy greater insurance against the unforeseen contingencies which the ex-ante contract cannot take into account. In this context, we are able to characterize fully the optimal decision rule for the court. The behavior of the optimal court is determined by the tradeoff between the need for incentives and the gains from insurance that voiding in some circumstances offers to the agents.

Keywords: Optimal Courts; Unforeseen Contingencies; Risk; Incentives (search for similar items in EconPapers)
JEL-codes: C79 D74 D89 K40 L14 (search for similar items in EconPapers)
Date: 2003-03
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Related works:
Journal Article: Courts of Law and Unforeseen Contingencies (2007) Downloads
Working Paper: Courts of Law and Unforeseen Contingencies (2006) Downloads
Working Paper: Courts of Law and Unforeseen Contingencies (2003) Downloads
Working Paper: Courts of law and unforeseen contingencies (2003) Downloads
Working Paper: Courts of Law and Unforeseen Contingencies (2001) Downloads
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