Under the doctrine of vicarious liability, a deep-pocket principal is often held responsible for a third-party harm caused by a judgment-proof agent's negligence. We analyze the incentive contract used by the principal to control the agent's behavior when a court can make an error in determining...

When a contract is signed between two economic agents, it is likely to produce some effect on non-contracting, third parties and provide new information to the contracting parties. This thesis examines how such third party externality and newly generated information should affect the initial...

The paper examines the role played by the parol evidence rule and integration when contracting parties are asymmetrically informed. The paper shows that by integrating an agreement, an uninformed party can better induce information disclosure from an informed party by penalizing non-disclosure...

Under conventional contract theory, contracts may be efficient by protecting relationship-specific investment from hold-up in subsequent (re)negotiation over terms of trade. This paper demonstrates a different problem than hold-up when specific investment also provides significant private...

An entrepreneur can organize either a for-profit or a non-profit firm to sell product or service to consumers in the long run. Because quality is non-verifiable and unobservable investment can still produce low quality, in equilibrium, consumers impose relational sanctions when low quality is...

A potentially dangerous product is supplied by a competitive market. The likelihood of a product-related accident depends on the unobservable precautions taken by the manufacturer and on the type of the consumer. Contracts include the price to be paid by the consumer ex ante and stipulated...

This essay examines the role played by earnouts in mergers and acquisitions transactions. When one party is better informed of the true value of the deal than the other, the parties face the well-known “lemons” problem, which could prevent them from consummating the transaction even when...

What role do contracts play in long-term relationships? Very little, if any, according to the relational contract literature. It is not the contract that induces promise-keeping but the imposition of (or threat of imposing) relational or informal sanctions, such as suspension or termination of...

Contract theory typically holds that verification costs are obstacles to complete contracting; yet, real world contracts often contain provisions that seem costly to verify. We show how a costly signal can play an important role in contracts. Verification (or litigation) costs operate as a...

Over the past forty years, an irrelevance proposition has been prevalent in law-and-economics scholarship: bargaining power should affect only price and not nonprice terms of a contract. In contrast, practitioners and commentators in industry regularly invoke bargaining power to explain static...