Verifiability and Contract Enforcement: A Model with Judicial Moral Hazard
Source: Journal of Law, Economics, and Organization, Volume 18, Number 1, 01 April 2002 , pp. 67-94(28)
Publisher: Oxford University Press
Abstract:I model the litigation of a contract containing a variable not observable by courts, hence nonverifiable, unless the rational and self‐interested judge exerts effort. He values the correct ruling but dislikes effort. Judicial effort is discretionary. I show that effort cost is inconsequential—“always breach” is equilibrium for any effort cost. But there exists another equilibrium where a small breach rate is achieved even with significant effort costs. Maximal remedies for breach are not optimal. Because effort is discretionary, low effort cost increases breach. Pretrial negotiations can have a substantial negative impact on verifiability under arbitrarily small deviations from full rationality.
Document Type: Research Article
Publication date: 2002-04-01
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