Optimally vague contracts and the law

dc.contributor.author Gennaioli, Nicola
dc.contributor.author Ponzetto, Giacomo A. M.
dc.date.accessioned 2021-09-16T09:19:45Z
dc.date.available 2021-09-16T09:19:45Z
dc.date.issued 2017-01
dc.description.abstract Many real-world contracts contain vague clauses despite the enforcement risk they entail. To study the causes and consequences of this phenomenon, we build a principal agent model in which contracts can include vague clauses whose enforcement may be distorted by opportunistic litigants and biased judges. We find three results. First, the optimal contract is vague, even if courts are very imperfect. Second, the use of vague clauses is a public good: it promotes the evolution of precedents, so future contracts become more complete, incentives higher powered, and surplus larger. Third, as precedents evolve, vague contracts spread from sophisticated to unsophisticated parties, expanding market size. Our model sheds light on the evolution and diffusion of business-format franchising and equity finance.ca
dc.format.mimetype application/pdf*
dc.identifier.uri http://hdl.handle.net/10230/48465
dc.language eng
dc.language.iso engca
dc.rights.accessRights info:eu-repo/semantics/openAccessca
dc.subject.other Incomplete contractsca
dc.subject.other Contract enforcementca
dc.subject.other Optimal contractsca
dc.subject.other Legal evolutionca
dc.subject.other Precedentsca
dc.title Optimally vague contracts and the lawca
dc.type info:eu-repo/semantics/workingPaperca

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