Completing Contracts in the Shadow of Costly Verification

Abstract Contract theory typically holds that verification costs are obstacles to complete contracting; yet real‐world contracts often contain provisions that seem costly to verify. We show how verification (or litigation) costs operate as a screen on the promisee’s incentive to sue and as an effect...

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Bibliographische Detailangaben
Veröffentlicht in:	The Journal of Legal Studies. - The University of Chicago Law School. - 37(2008), 2, Seite 503-534
1. Verfasser:	Choi, Albert (VerfasserIn)
Weitere Verfasser:	Triantis, George
Format:	Online-Aufsatz
Veröffentlicht:	2008
Zugriff auf das übergeordnete Werk:	The Journal of Legal Studies
Schlagworte:	Law Economics Business Behavioral sciences Social sciences Albert


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520			\|a Abstract Contract theory typically holds that verification costs are obstacles to complete contracting; yet real‐world contracts often contain provisions that seem costly to verify. We show how verification (or litigation) costs operate as a screen on the promisee’s incentive to sue and as an effective sanction against the breaching promisor. As long as the court’s judgment is correlated with the promisor’s behavior, the parties can design a set of prices (including damages) to provide additional incentive to the promisor through an off‐the‐equilibrium, credible litigation threat. We show that the parties may prefer to adopt a costly signal over a costless signal. Rather than focus solely on either the problems of adjudication or those of contracting (without sufficient regard to how the disputes will be resolved in the future), we take a more comprehensive approach by looking at the design of contracts in anticipation of the path of the adjudication process.
540			\|a © 2008 by The University of Chicago. All rights reserved.
650		4	\|a Law \|x Judicial system \|x Legal proceedings \|x Litigation
650		4	\|a Economics \|x Microeconomics \|x Economic costs and benefits \|x Economic costs \|x Cost efficiency
650		4	\|a Law \|x Civil law \|x Civil damages \|x Liquidated damages
650		4	\|a Law \|x Civil law \|x Contract law \|x Contracts
650		4	\|a Business \|x Business structures \|x Business partnerships \|x Franchise agreements
650		4	\|a Behavioral sciences \|x Behavioral economics \|x Behavioral finance \|x Financial incentives \|x Contract incentives
650		4	\|a Social sciences \|x Communications \|x Negotiation \|x Bargaining \|x Bargaining power
650		4	\|a Business \|x Industry \|x Industrial sectors \|x Service industries \|x Legal services \|x Legal fees \|x Court costs
650		4	\|a Behavioral sciences \|x Behavioral economics \|x Behavioral finance \|x Financial incentives \|x Cost incentives
650		4	\|a Law \|x Judicial system \|x Legal proceedings \|x Litigation \|x Litigation parties \|x Litigants \|x Defendants
650		4	\|a Law \|x Judicial system \|x Legal proceedings \|x Litigation
650		4	\|a Economics \|x Microeconomics \|x Economic costs and benefits \|x Economic costs \|x Cost efficiency
650		4	\|a Law \|x Civil law \|x Civil damages \|x Liquidated damages
650		4	\|a Law \|x Civil law \|x Contract law \|x Contracts
650		4	\|a Business \|x Business structures \|x Business partnerships \|x Franchise agreements
650		4	\|a Behavioral sciences \|x Behavioral economics \|x Behavioral finance \|x Financial incentives \|x Contract incentives
650		4	\|a Social sciences \|x Communications \|x Negotiation \|x Bargaining \|x Bargaining power
650		4	\|a Business \|x Industry \|x Industrial sectors \|x Service industries \|x Legal services \|x Legal fees \|x Court costs
650		4	\|a Behavioral sciences \|x Behavioral economics \|x Behavioral finance \|x Financial incentives \|x Cost incentives
650		4	\|a Law \|x Judicial system \|x Legal proceedings \|x Litigation \|x Litigation parties \|x Litigants \|x Defendants
650		4	\|a Albert
655		4	\|a research-article
700	1		\|a Triantis, George \|e verfasserin \|4 aut
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856	4	0	\|u https://doi.org/10.1086/589665 \|3 Volltext
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