2008/06/01 by Albert Choi, Albert H. Choi, George G. Triantis +1
Business, Management and Accounting · Economics, Econometrics and Finance · Social Sciences · #Adjudication #Anticipation (artificial intelligence) #Business #Computer science #Consummation #Corporate Insolvency and Governance #Damages #Economics #Incentive #Law #Law and economics #Law, Economics, and Judicial Systems #Legal principles and applications #Microeconomics #Political science #Process (computing) #Set (abstract data type) #Shadow (psychology)
paper · doi:10.1086/589665
crossref issued 2008/06/01 · crossref published 2008/06/01 · crossref published-print 2008/06/01 · openalex publication_date 2008/06/01 · crossref created 2008/09/09 · crossref deposited 2018/04/07 · openalex created_date 2025/10/10 · crossref indexed 2026/07/29 · openalex updated_date 2026/07/30
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 verification (or litigation) costs operate as a screen on the promisee’s incentive to sue and as an effective sanction against the breaching promisor. As long as the court’s judgment is correlated with the promisor’s behavior, the parties can design a set of prices (including damages) to provide additional incentive to the promisor through an off‐the‐equilibrium, credible litigation threat. We show that the parties may prefer to adopt a costly signal over a costless signal. Rather than focus solely on either the problems of adjudication or those of contracting (without sufficient regard to how the disputes will be resolved in the future), we take a more comprehensive approach by looking at the design of contracts in anticipation of the path of the adjudication process.