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Should courts always enforce what contracting parties write?

By Luca Anderlini, Leonardo Felli and Andrew Postlewaite

Abstract

We find an economic rationale for the common-sense answer to the question in our title ¿ courts should not always enforce what the contracting parties write. We describe and analyse a contractual environment that allows a role for an active court. An active court can improve on the outcome that the parties would achieve without it. The institutional role of the court is to maximize the parties' welfare under a veil of ignorance. We study a buyer-seller model with asymmetric information and ex-ante investments, in which some contingencies cannot be contracted on. The court must decide when to uphold a contract and when to void it. The parties know their private information at the time of contracting, and this drives a wedge between ex-ante and interim-efficient contracts. In particular, some types pool in equilibrium. By voiding some contracts that the pooling types would like the court to enforce, the court is able to induce them to separate, and hence to improve ex-ante welfare

Topics: HF Commerce, K Law (General)
Publisher: Suntory and Toyota International Centres for Economics and Related Disciplines, London School of Economics and Political Science
Year: 2003
OAI identifier: oai:eprints.lse.ac.uk:3593
Provided by: LSE Research Online

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