New Economics Papers
on Law and Economics
Issue of 2005‒05‒23
two papers chosen by
Jeong-Joon Lee, Towson University

  1. Resolution, Recovery and Survival: The Evolution of Payment Disputes in Post-Socialist Europe By William Pyle; ;
  2. Should Courts Always Enforce What Contracting Parties Write? By Luca Anderlini; Leonardo Felli; Andrew Postlewaite

  1. By: William Pyle; ;
    Abstract: What determines the mechanism chosen to resolve a commercial dispute? To what degree does the aggrieved recover damages? And does the relationship survive in the aftermath? The answers to these questions affect expectations as to the costs of transacting and, thereby, the development of markets. But they have received almost no attention in the economic literature on the post-socialist transition. This article exploits a rich survey of small and medium-sized manufacturing enterprises in three post-socialist countries to explain behavioral responses to an inter-firm payment dispute. Particular attention is given to how the evolution of disputes is sensitive to both the geographic distance between trade partners and membership in a business association.
    Keywords: commercial dispute, business association, transition
    JEL: D23 D74 K40 K41 P37
    Date: 2005–03–01
  2. 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

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