Courts and Contractual Innovation: A Preliminary Analysis

FRB of Philadelphia Working Paper No. 05-27/R

31 Pages Posted: 22 Dec 2005

See all articles by Mitchell Berlin

Mitchell Berlin

Federal Reserve Bank of Philadelphia - Research Department

Yaron Leitner

Washington University in St. Louis

Date Written: December 2005

Abstract

We explore a model in which agents enter into a contract but are uncertain about how a judge will enforce it. The judge can consider a wide range of evidence, or instead, use a rule-based method of judgment that relies on limited information. We focus on the following tradeoff: Considering a wide range of evidence increases the likelihood of a correct ruling in the case at hand but undermines the formation of precedents that resolve legal uncertainty for subsequent agents.

In a model of contractual innovation, we show that the use of evidence increases the likelihood of innovation in any period, while rule-driven judgments increase the rate of diffusion of the innovation. When courts can use a mixture of evidence and rules, the minimum amount of evidence that induces adoption is (weakly) decreasing over time. We also examine the breadth of precedents. Overlapping jurisdictions reduce the optimal breadth of precedents because broad precedents are more likely to introduce conflict. Accordingly, overlapping jurisdictions increase the value of using evidence. We use our model to interpret differences between the legal systems in the U.S. and England.

Keywords: courts, contracts, innovation, evidence, precedents, legal systems

JEL Classification: D86, K00, K12, K40

Suggested Citation

Berlin, Mitchell and Leitner, Yaron, Courts and Contractual Innovation: A Preliminary Analysis (December 2005). FRB of Philadelphia Working Paper No. 05-27/R. Available at SSRN: https://ssrn.com/abstract=849248 or http://dx.doi.org/10.2139/ssrn.849248

Mitchell Berlin

Federal Reserve Bank of Philadelphia - Research Department ( email )

Ten Independence Mall
Philadelphia, PA 19106-1574
215-574-3822 (Phone)
215-574-4364 (Fax)

Yaron Leitner (Contact Author)

Washington University in St. Louis

MO
United States

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