Verifiability and Contract Enforcement: A Model with Judicial Moral Hazard

Posted: 5 Feb 2002

See all articles by Murat Usman

Murat Usman

Koc University - Department of Economics

Abstract

We model the litigation of a contract containing a variable not observable by courts, hence non verifiable, unless the rational and self-interested judge exerts effort. He values the correct ruling but dislikes effort. Judicial effort is discretionary. We show that effort cost is inconsequential, - "always breach" is equilibrium for any effort cost. But there exists another equilibrium where a small breach rate is achieved even with significant effort costs. Maximal remedies for breach are not optimal. Because effort is discretionary, low effort cost increases breach. Pre-trial negotiations can have a substantial negative impact on verifiability under arbitrarily small deviations from full rationality.

Suggested Citation

Usman, Murat, Verifiability and Contract Enforcement: A Model with Judicial Moral Hazard. Available at SSRN: https://ssrn.com/abstract=291793

Murat Usman (Contact Author)

Koc University - Department of Economics ( email )

Rumeli Feneri Yolu
College of Administrative Sciences & Economics
Sariyer 80910, Istanbul
Turkey
+90 212 338 1553 (Phone)
+90 212 338 1653 (Fax)

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Abstract Views
545
PlumX Metrics