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Courts of law and unforeseen contingencies

Anderlini, Luca and Felli, Leonardo and Postlewaite, Andrew (2001) Courts of law and unforeseen contingencies. 2835. Centre for Economic Policy Research, London, UK.

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Identification Number: 2835

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 court voids the contract, the parties can renegotiate a new agreement ex post. There are two effects of a court that voids more contracts. The parties’ incentives to undertake relationship-specific investment are reduced, while the parties enjoy greater insurance against the unforeseen contingencies that the ex ante contract cannot take into account. In this context, we are able to characterize fully the optimal decision rule for the court. The behaviour 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.

Item Type: Monograph (Discussion Paper)
Official URL: http://www.cepr.org
Additional Information: © 2001 Luca Anderlini, Leonardo Felli and Andrew Postlewaite
Subjects: H Social Sciences > HB Economic Theory
K Law > K Law (General)
Sets: Research centres and groups > Financial Markets Group (FMG)
Collections > Economists Online
Departments > Economics
Research centres and groups > Suntory and Toyota International Centres for Economics and Related Disciplines (STICERD)
Collections > LSE Financial Markets Group (FMG) Working Papers
Date Deposited: 04 Jun 2008 15:07
Last Modified: 27 Feb 2014 15:36
URI: http://eprints.lse.ac.uk/id/eprint/5353

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