Working Paper: CEPR ID: DP8405
Authors: Nicola Gennaioli
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 non-contingent 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.
Keywords: Imperfect judicial enforcement; Optimal contracts
JEL Codes: K00
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| judicial biases (K41) | enforcement risk (K42) |
| enforcement risk (K42) | types of contracts (K12) |
| judicial biases (K41) | types of contracts (K12) |
| judicial biases (K41) | adverse outcomes in judicial decisions (K41) |