Agency Law and Contract Formation
Indiana University Working Paper in Economics No. 95-006
Posted: 30 May 2001
Date Written: May 26, 2003
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: Suggested Citation