Active Courts and Menu Contracts*

Abstract

We describe and analyze a contractual environment that allows a role for an active court.The model we analyze is the same as in Anderlini, Felli, and Postlewaite (2006). Anactive court can improve on the outcome that the parties would achieve without it. Theinstitutional role of the court is to maximize the parties' welfare under a veil ofignorance.In Anderlini, Felli, and Postlewaite (2006) the possibility of "menu contracts" betweenthe informed buyer and the uninformed seller is described but not analyzed. Here, wefully analyze this case.We find that if we maintain the assumption that one of the potential objects of trade is notcontractible ex-ante, the results of Anderlini, Felli, and Postlewaite (2006) survive intact.If however we let all "widgets" be contractible ex-ante, then multiple equilibria obtain. Inthis case the role for an active court is to ensure the inefficient pooling equilibria do notexist alongside the superior ones in which separation occurs.Optimal Courts, Informational Externalities, Ex-ante Welfare, Informed Principal, Menu Contracts.