Contracting in the Presence of Judicial Agency

Abstract

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 obtained by considering other forms of imperfection in contract enforcement, such as variable expenditures on legal representation. I use the model to develop implications for the optimal punishment of individuals who are extorted by corrupt judges, and to establish circumstances under which a right-of-appeal is optimal.

Contracting institutions and ownership structure in international joint ventures

“…9 Since r * i is identical for both parties, their effects on v cancel each other out. Thus, each party's ex post revenue share is identical to its 9 Note that the IJV becomes unfeasible if γ ≥ 1 2 . In that case, for at least one of both parties, the share of revenue γ that it needs to pay for its rent-seeking actions exceeds its ownership share.…”

The Role of the Judiciary in the Public Decision‐Making Process

“…In particular, we assume the existence of one-to-one correspondences 6 between the control activity carried out by J and both the probability 1 − f with which it traces the payment T and a cost, determined by an uni-variate function S, in terms of effort to be exerted or resource allocation for the anti-corruption task to take place 7 . We thereby consider f as the choice variable for J and denote with S(f ) the cost associated with any level of control activity:…”

“…There is no shortage of evidence about judicial corruption, though often anecdotal in character. Several instances, especially in the U.S., are indeed given in which the latter has been detected and its existence proven ex-post (e.g., McMillan and Zoido, 2004;Bond, 2009). Substantial systematic evidence points to the fact that the rule of law does not apply in many countries and that judicial decisions are in fact subject to influence (e.g.…”

“…To this end, we investigate the equilibrium properties under complete information of public decision making when accounting for both this form of multiplicity of public actors involved in the process, and the possibility that, while being independent of the political authority, the Judiciary itself may be directly pressured by the lobby 2 . Existing work dealing with judicial agency has mostly focused on the corruption of law enforcers and its implications for the deterrence effectiveness of laws (e.g., Becker and Stigler, 1974); on the related issues of optimal monitoring and compensation schemes for law enforcers (e.g., Polinsky and Shavell, 2001) and of optimal regulation in the presence of corrupt contract enforcers (e.g., Immordino and Pagano, forthcoming); on the general contracting problem under judicial agency in a theoretical perspective (e.g., Bond, 2009). Nevertheless, the question whether the interdependencies between institutions and the interaction between political corruption at different government layers provides incentives to, alters or removes the lobbying activity, remains largely unanswered.…”

Financial development in adversarial and inquisitorial legal systems

“…Bond (2009) provides an analysis of the role of corrupted judges on contracting. This paper also abstracts from judges's personal biases.…”