Agency Law and Contract Formation

Indiana University Working Paper in Economics No. 95-006

Posted: 30 May 2001

See all articles by Eric Bennett Rasmusen

Eric Bennett Rasmusen

Indiana University - Kelley School of Business - Department of Business Economics & Public Policy

Date Written: May 26, 2003

Abstract

A number of issues in the common law arise when agents make contracts on behalf of principals. Should a principal be bound when his agent makes a contract with some third party on his behalf which the principal would immediately wish to disavow? The tradeoffs resemble those in tort, so the least-cost-avoider principle is useful for deciding when contracts are valid, and may be the underlying logic behind a number of different doctrines in agency law. In particular, an efficiency explanation can be found for the undisclosed principal rule, under which the principal is bound even when the third party is unaware that the agent is acting as an agent.

Keywords: agency law, contracts,principal-agent problem, undisclosed principal

JEL Classification: K12

Suggested Citation

Rasmusen, Eric Bennett, The Economics of Agency Law and Contract Formation. Indiana University Working Paper in Economics No. 95-006, Available at SSRN: https://ssrn.com/abstract=6761

Eric Bennett Rasmusen (Contact Author)

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