Research Handbook on Economic Models of Law

Research Handbook on Economic Models of Law

Research Handbooks in Law and Economics series

Edited by Thomas J. Miceli and Matthew J. Baker

One of the great successes of the law and economics movement has been the use of economic models to explain the structure and function of broad areas of law. The original contributions to this volume epitomize that tradition, offering state-of-the-art research on the many facets of economic modeling in law.

Chapter 13: Active courts and menu contracts

Luca Anderlini, Leonardo Felli and Andrew Postlewaite

Subjects: economics and finance, history of economic thought, law and economics, methodology of economics, law - academic, law and economics


In a recent paper (Anderlini, Felli, and Postlewaite 2011) we showed, by means of a simple example, that Courts that actively intervene in partiesí contracts may improve on the outcome these parties could achieve without intervention. In particular if the role of the Court is to maximize the partiesí welfare under the veil of ignorance, Court intervention can induce parties to reveal their private information and enhance their ex-ante welfare. The example in Anderlini, Felli, and Postlewaite (2011) is one in which parties are asymmetrically informed when they write their ex-ante contract. The seller knows the value and cost associated with the widget she provides while the buyer is uninformed. If the seller is restricted to offering a simple trading contract (a price at which to trade the widget in question) without the Courtís intervention she will offer the same price whatever the value and the cost of the widget. In other words, different types of seller offer the same trading contract and in equilibrium inefficient pooling arises. Court intervention that takes the form of a restriction on the price at which the parties can trade, induces the different types of seller to separate and reveal their private information. In so doing the inefficiency associated with the sellersí pooling is eliminated and ex-ante welfare increases. In this chapter we consider a different example from the one in Anderlini, Felli, and Postlewaite (2011).

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