| By: |
Luca Anderlini (Department of Economics, Georgetown University);
Leonardo Felli (London School of Economics, Department of Economics, CESifo (Center for Economic Studies and Ifo Institute for Economic Research), Centre for Economic Policy Research (CEPR));
Andrew Postlewaite (Department of Economics, University of Pennsylvania) |
| Abstract: |
We find an economic rationale for the common sense answer to the question in
our title — courts should not always enforce what the contracting parties
write. We describe and analyze a contractual environment that allows a role
for an active court. An active court can improve on the outcome that the
parties would achieve without it. The institutional role of the court is to
maximize the parties’ welfare under a veil of ignorance. We study a
buyer-seller model with asymmetric information and ex-ante investments, in
which some contingencies cannot be contracted on. The court must decide when
to uphold a contract and when to void it. The parties know their private
information at the time of contracting, and this drives a wedge between
ex-ante and interim-efficient contracts. In particular, some types pool in
equilibrium. By voiding some contracts that the pooling types would like the
court to enforce, the court is able to induce them to separate, and hence to
improve ex-ante welfare. |
| Keywords: |
Optimal Courts, Informational Externalities, Ex-ante Welfare |
| JEL: |
C79 D74 D89 K40 L14 |
| Date: |
2003–11–01 |
| URL: |
http://d.repec.org/n?u=RePEc:pen:papers:03-026&r=law |