Courts of Law and Unforeseen Contingencies

Posted: 23 Jun 2008

See all articles by Luca Anderlini

Luca Anderlini

Georgetown University - Department of Economics

Leonardo Felli

University of Cambridge, Faculty of Economics; CESifo (Center for Economic Studies and Ifo Institute); Centre for Economic Policy Research (CEPR)

Andrew Postlewaite

University of Pennsylvania - Department of Economics

Multiple version iconThere are 3 versions of this paper

Date Written: October 2007

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 contracts. The parties' incentives to undertake relationship-specific investment are reduced, and the parties enjoy greater insurance against the unforeseen contingencies that the ex ante contract cannot account for. In this context, we fully characterize the optimal decision rule for the court. The behavior of the optimal court is determined by the trade-off between the need for incentives and the gains from insurance that voiding in some circumstances offers to the agents.

Suggested Citation

Anderlini, Luca and Felli, Leonardo and Postlewaite, Andrew, Courts of Law and Unforeseen Contingencies (October 2007). The Journal of Law, Economics, & Organization, Vol. 23, Issue 3, pp. 662-684, 2007, Available at SSRN: https://ssrn.com/abstract=1150022 or http://dx.doi.org/10.1093/jleo/ewm017

Luca Anderlini (Contact Author)

Georgetown University - Department of Economics ( email )

Washington, DC 20057
United States
202-687-6361 (Phone)
202-687-6102 (Fax)

HOME PAGE: http://www.georgetown.edu/faculty/la2/

Leonardo Felli

University of Cambridge, Faculty of Economics ( email )

Austin Robinson Building
Sidgwick Avenue
Cambridge, CB3 9DD
United Kingdom
+44 1223 335221 (Phone)

HOME PAGE: http://www.felli.info

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Andrew Postlewaite

University of Pennsylvania - Department of Economics ( email )

Ronald O. Perelman Center for Political Science
133 South 36th Street
Philadelphia, PA 19104-6297
United States
215-898-7350 (Phone)
215-573-2057 (Fax)

HOME PAGE: http://www.econ.upenn.edu/~apostlew

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