Long-Term Contracts and the Principal-Agent Problem

This paper examines the principal-agent problem within professional sports. Imperfect information between managers and players, as well as the guaranteed income a long-term contract provides, are predicted to provide players with the incentive to alter effort over the length of a contract – especially during the first year of a long-term contract. Regression analysis indicates that players’ performance levels decline during the first year of a long-term contract, suggesting that the effects of the principal-agent problem may outweigh competing effects. The study does not, however, suggest that players increase performance in the final year of a contract

Promise, Agreement, Contract

It is natural to wonder about contract law’s relationship to the morality of promises and agreements. This Chapter distinguishes two ways to conceive of that relationship. First, parties’ agreement-based moral obligations might figure into the explanation of contract law—into an account of its functions or justifications. Contract law might serve to enforce parties’ first-order performance obligations, to enforce second-order remedial obligations, to support the culture of making and keeping agreements more generally, or at least to do no harm to that culture or to people’s ability to act morally. Second, contract can be understood as the legal analog to promise. Both contract and promise enable people to undertake new obligations to one another when they wish. Each is a type of normative power, the one legal, the other moral. The Chapter concludes by arguing that these two ways of thinking about contract law are not mutually exclusive. Contract law both imposes on parties to exchange agreements a legal obligation to perform for reasons independent of the parties’ possible contractual intent, and confers on them the power to undertake that legal obligation when they so intend because they so intend

Breakup of Repeat Transaction Contracts, Specific Investment, and Efficient Rent-Seeking

In a repeat trade model with buyer's specific investment, a simple renegotiable contract implements an efficient outcome if premature termination of trade is governed by an appropriate contract breakup rule. In equilibrium, such a rule allows for termination with positive probability and gives the buyer a bargaining leverage over the seller when the contract is renegotiated ex-post. These returns ("breakup rents") from buyer's rent-seeking complement his ex-post bargaining power and restore his ex-ante investment incentives when he would otherwise underinvest due to a standard (ex-ante) hold-up problem. Buyer's opportunism thus creates social value and restores efficiency in case of frictionless renegotiation. When the contract is rigid and not renegotiable until after the first round of trade, however, a first-best breakup rule does not exist. A second-best rule trades off buyer's investment and seller's activity distortions that arise from excessive effort to curb the buyer's bargaining leverage. Conditions on existence of a first or second-best breakup rule as well as implications for the legal discussion on compliance standards for breach of contract are given.Repeat transaction trade, contract breakup, specific investment, hold-up, rent-seeking, installment contracts, compliance standards, breach of contract

Contractual Incentive Provision and Commitment in Rent-Seeking Contests

In this paper, we consider a symmetric rent-seeking contest, where employees lobby for a governmental contract on behalf of firms. The only verifiable information is which firm is assigned the contract. We derive the optimal wage contracts of the employees and analyze, whether commitment by determining the wage contract prior to the competitor is profitable. This is indeed the case, i.e. firms prefer to move first in the wage-setting subgame. This complements previous work on rent-seeking contests emphasizing that commitment via rent-seeking expenditures is unprofitable in symmetric contests.Contest; First-Mover Advantage; Commitment; Wage Contract

On and Off Contract Remedies

A party dissatisfied with the contractual performance of a counterparty is typically able to pursue a variety of legal recourses. Within this apparent variety lurk two fundamental alternatives. The aggrieved party may (i) “affirm” the contract and seek money damages or specific performance; or (ii) “disaffirm” the contract with the remedy of rescission and restitution. This simple dichotomy of contract remedies applies broadly in both common law and civil law practice. We show here that this remedial regime allows parties to write simple contracts that induce first-best cooperative investments

Contractual Incentive Provision and Commitment in Rent-Seeking Contests

In this paper, we consider a symmetric rent-seeking contest, where employees lobby for a governmental contract on behalf of firms. The only verifiable information is which firm is assigned the contract. We derive the optimal wage contracts of the employees and analyze, whether commitment by determining the wage contract prior to the competitor is profitable. This is indeed the case, i.e. firms prefer to move first in the wage-setting subgame. This complements previous work on rent-seeking contests emphasizing that commitment via rent-seeking expenditures is unprofitable in symmetric contests

More order with less law: on contract enforcement, trust, and crowding

Most contracts, whether between voters and politicians or between house owners and contractors, are incomplete. “More law,” it typically is assumed, increases the likelihood of contract performance by increasing the probability of enforcement and/or the cost of breach. We examine a contractual relationship in which the first mover has to decide whether she wants to enter a contract without knowing whether the second mover will perform. We analyze how contract enforceability affects individual performance for exogenous preferences. Then we apply a dynamic model of preference adaptation and find that economic incentives have a nonmonotonic effect on behavior. Individuals perform a contract when enforcement is strong or weak but not with medium enforcement probabilities: Trustworthiness is “crowded in” with weak and “crowded out” with medium enforcement. In a laboratory experiment we test our model’s implications and find support for the crowding prediction. Our finding is in line with the recent work on the role of contract enforcement and trust in formerly Communist countries

Agri-environmental schemes in the European Union: the role of ex ante costs

The purpose of this paper is to analyse land allocation between competing agri-environmental contracts taking into account institutional issues and farm household and farm characteristics. We consider a Biodiversity Protection Contract, Landscape Management Contract and a Restriction on Intensive Practises Contract. The paper shows that it is important to study the choice for an agrienvironmental contract in combination with the choice for other agri-environmental contracts. The reasons being that a unit of land can only be allocated to one contract (although a farm can select more than one contract) and perceived relative marginal costs of contracts can change if institutional settings and farm household and farm characteristics alter. The model uses a two stage method. In the first step the probability of contract choice is determined. In the second stage these probabilities are linked to ex ante costs (including transaction costs) and optimal contract choice is determined.Agri-environmental contracts, transaction costs, contract choice, Agricultural and Food Policy, Environmental Economics and Policy, Land Economics/Use,

Mendocino power plant site ecological study, Quarterly Report No. 1; July 1 - September 30, 1971

This report is the first quarterly report submitted in partial fulfillment of Research Contract No. S-1902 between the Department of Fish and Game and the Pacific Gas and Electric Company. Through this contract the Department of Fish and Game is to conduct a pre-operational ecological study to establish a base line inventory of the marine biota with special reference to fish and to abalone, including food chains. Quarterly reports will be followed by annual reports. The first annual report will cover all work from September 1971 through December 1972. Full tables and species lists will be included in each annual report

The Error Theory of Contract

Many people have false beliefs about contract doctrine. That pervasive phenomenon has profound practical, theoretical, and normative implications that neither courts nor scholars have recognized. This Article will make three contributions to fill that gap. First, it will establish just how widespread the phenomenon is among non-lawyers. After synthesizing the existing evidence of false beliefs about contract law, it will contribute a new empirical study showing that between one-third and one-half of people falsely believe specific performance rather than damages is the remedy for breach. The Article will then argue that people’s false beliefs about contract doctrine pose a fundamental challenge to prominent promise- and consent-based theories of contract, which serve as the principal theoretical alternative to law and economics theories of contract. Because people have false beliefs about aspects of contract doctrine that affect the value of the contract, the law enforces a bargain materially different from the one to which people thought they agreed. For example, they pay a contract price they think purchases them a guarantee of performance, but the law ultimately provides them only with money damages for breach. People thus did not actually promise or consent to the bargain the law enforces. For that reason, the normative justification for existing contract doctrine cannot be grounded in promise or consent. Finally, the Article will explore the implications of that conclusion for ongoing doctrinal disputes. First, by removing promise or consent as a potential normative basis for contract doctrine, we may finally have grounds to settle long-standing disputes that ultimately depend on our choice of normative foundations about doctrines like consideration, mitigation, and unconscionability. Second, by failing to recognize the phenomenon of legal ignorance, the current debate about boilerplate misunderstood the problem it poses. If people are ignorant of, and, therefore, do not consent to, both boilerplate contract terms and the background law that would apply if boilerplate were not enforced, then refusing to enforce boilerplate does not solve the problem of lack of consent—it simply moves it from a lack of consent to fine-print terms to a lack of consent to gap-filling background law. The problem of the lack of consent is, therefore, one that banning boilerplate cannot solve. Instead, reform should focus on the remaining problem that boilerplate is substantively biased in favor of the firms that draft it. The solution, then, may be to allow boilerplate, but to regulate its content to ensure it offers terms that are not too slanted in the firms’ favor