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- Title
OPTIMAL CONTRACTS WITH ENFORCEMENT RISK.
- Authors
Gennaioli, Nicola
- 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 noncontingent 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.
- Subjects
FINANCIAL risk; ECONOMIC models; EMPIRICAL research; MEASUREMENT errors; TRANSACTION costs; INSURED losses
- Publication
Journal of the European Economic Association, 2013, Vol 11, Issue 1, p59
- ISSN
1542-4766
- Publication type
Article
- DOI
10.1111/j.1542-4774.2012.01107.x