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2009

Business Law, Public Responsibility, and Ethics

Finance Papers

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Contracting In The Presence Of Judicial Agency, Philip Bond Jan 2009

Contracting In The Presence Of Judicial Agency, Philip Bond

Finance Papers

While a key function of contracts is to provide incentives, the incentives of judges to enforce the terms of a contract have rarely been examined. This paper develops a simple model of judicial agency in which judges are corrupt and can be bribed by contracting parties. Higher-powered contracts expose contracting parties to more frequent and more severe corruption, which in turn lessens the incentives actually provided by the contract. Consequently the model predicts that individuals will commonly refrain from writing high-powered contracts, even when such contracts would be valuable absent judicial agency. I show that similar implications can also be ...