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Optimal Contracts With Enforcement Risk

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  • Nicola Gennaioli

Abstract

I build a model where potentially biased judges verify complex states by interpreting an imperfect signal whose noise captures factual ambiguities. In a sales and a financial transaction I show that judicial biases amplify and distort factual ambiguities, creating enforcement risk. To insure against such risk, parties write simple non-contingent contracts that optimally protect the party that is most vulnerable to judicial error. These results shed light on the empirical association between law and finance and rationalize salient features of real world enforcement regimes.
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Suggested Citation

  • Nicola Gennaioli, 2013. "Optimal Contracts With Enforcement Risk," Journal of the European Economic Association, European Economic Association, vol. 11(1), pages 59-82, February.
    • Handle: RePEc:bla:jeurec:v:11:y:2013:i:1:p:59-82
    DOI: j.1542-4774.2012.01107.x
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    JEL classification:

    • K00 - Law and Economics - - General - - - General (including Data Sources and Description)

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