Showing papers on "Principal (commercial law) published in 1994"

A Quiet Revolution The European Court of Justice and its Interlocutors

Abstract: Although the governments of the member states of the European Community (EC) have always had a principal role in fashioning EC policies and norms, from the 1960s through the 1980s the European Cour...

Renegotiation and Optimality in Agency Contracts

Abstract: We analyse renegotiation in a hidden action principal-agent model. Contract renegotiation offers are made by the agent. A refinement is imposed on the principal's beliefs: if precisely one action is optimal with respect to both the principal's and the agent's contracts, the principal believes that that action has been taken. With the refinement imposed, perfect-Bayesian equilibrium allocations are identical to the second best in the classical principal-agent model without renegotiation. When renegotiation is led by the agent and when equilibria satisfy the refinement, equilibrium allocations are ex ante efficient. Incentive contracting is a common mechanism for promoting ex ante investments and for avoiding ex post opportunistic behaviour in a long-term or continuing economic relationship. The classical principal-agent model (Holmstrom (1979), Grossman and Hart (1983)) is a natural framework for this class of problem. In such a model, a risk-averse agent performs an action on behalf of a risk-neutral principal; the agent's action is unobservable and affects the principal's revenue in a random fashion. The derivation and characterization of efficient compensation schemes have been the major focus in the principal-agent literature. Generally, the incentives to motivate a costly action from the agent take the form of "profit sharing:" the agent's reward is made contingent on his random performance outcomes.

Why an Informed Principal May Leave Rents to an Agent

Abstract: This paper characterizes incentive contracts for the situation where a principal is privately informed about the technology governing an agency relationship. In contrast to a standard principal-agent relationship, it is shown that a principal who values effort highly will choose to induce effort by paying a high base wage and low bonus payments. Moreover, the equilibrium contract has the principal transferring rents to the agent even though contracting possibilities are unrestricted and both principal and agent are risk neutral. Consequently, the informed-principal framework is shown to provide a rational for the payment of efficiency wages. Copyright 1994 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.

Agency in health care: lessons for economists from sociologists

Abstract: Introduction CONSUMER SOVEREIGNTY many economists have argued, does not apply in the market for health care because of the asymmetry of information between the patient and doctor. The patient-doctor relationship has thus been modelled within the economic theory of agency, with consideration of associated incentive problems. While the concept of agency has become widely accepted in health economics, very little research has been carried out into the distribution of property rights within this relationship i.e. what are the rights of the patients and doctors within this relationship and what ought they to be? To answer these questions information is needed on the nature of the patient's and the doctor's utility functions. It is important to know the nature of the patient's and doctor's utility functions for two reasons. Firstly given the interdependence of the patient's and doctor's utility function, a necessary (but not sufficient) condition for an efficient outcome in health care is that we establish the nature of these utility functions. Only then can we attempt to devise optimal reward systems that encourage doctors to consider patient preferences in the decision-making process. Secondly, only when health economists know the nature of the patient's utility function will they be able to evaluate health care interventions properly. The purpose of this paper is to shed light on the nature of the patient's and doctor's utility functions. It is shown that, to date, most health economists have assumed that the only relevant argument in the patient's utility function is health outcome. Consideration of the doctor's utility function by health economists has tended to take place within the debate on supplier-induced demand, concentrating on the trade-offs that exist between income and leisure. Leading on from this, the paper considers the sociological literature on the doctor-patient relationship. It is argued that only when economists take note of this literature will a more efficient outcome in health care be achieved. II The Economic Theory of Agency THE ECONOMIC THEORY OF AGENCY arises out of the existence of an asymmetry of information i.e. the individuals involved in a transaction have different levels of information. Such a situation exists in many markets: firms and employees, insurance companies and clients, patients and doctors, a car mechanic and his/her client. The basic theory is characterized by a principal (ill-informed individual) and agent (informed individual), both of whom are attempting to maximise their independent utility functions. The recognition of these independent utility functions, coupled with the assymetry of information, makes the agency relationship interesting since these two characteristics mean that the agent has scope for the pursuit of his/her own interests. Thus, in the case of the car mechanic and client, given that the client has less information than the mechanic regarding what is wrong with the car, the mechanic may induce demand to maximise his/her income, and say, for example, that the car needs new parts that it does not. Given this, the principal must devise a method of remuneration to ensure that the agent does not cheat. This is accomplished by compensation rules or incentive compatibility constraints |MacDonald (1984), Arrow (1986)~. Given that the agent has the choice of whether or not to accept the remuneration system, the principal has to ensure that the contract is attractive to the agent. This is known as the viability or participation constraint |Arrow (1986)~. Although at first sight principal-agency theory seems directly relevant to the doctor-patient relationship, closer examination reveals key differences. These differences must be recognized if we are to understand the interactions that take place between a doctor and a patient. In the next section we look at how economists have modelled the agency relationship in health care. …

Improving the Environment of Agency Rulemaking: An Essay on Management, Games, and Accountability

Abstract: As late as the presidency of John F Kennedy, the principal image of federal administrative action was the adjudication of a case-a prosecution by the Federal Trade Commission, an enforcement action by the National Labor Relations Board, a licensing proceeding before the Federal Communications or Federal Power Commissions, or a rate proceeding at the Interstate Commerce Commission.' Thirty years later, when U.S. citizens think of "regulation," they tend to think of the adoption of general rules concerning workplace safety by the Occupational and Safety Health Administration ("OSHA"), or of rules governing air or water quality by the Environmental Protection Agency ("EPA").2 Nor is rulemaking the exclusive province of post-New-Frontier agencies designed with that regulatory technique prominently in mind. The politically salient activities of old line agencies-Federal Trade Commission regulation of charm school and funeral home practices or Federal Power Commission deregulation of natural gas pipeline prices-often feature rulemaking rather than adjudication. This "paradigm shift" was in part evolutionary, but it also contained critical elements of conscious redesign of the administrative process. Regulatory reform movements in the 1960s emphasized rulemaking and extolled its virtues of

Political Conflict and Legal Agreement

Abstract: How is law possible in a heterogeneous society, composed of people who sharply disagree about basic values? Such disagreements involve the most important issues of social life: the distribution of wealth, the role of race and gender, the nature of free speech and private property. Much of the answer to this puzzle lies in an appreciation of how people who disagree on fundamental issues can achieve incompletely theorized agreements on particular cases.Lecture I sets out the basic idea of incompletely theorized agreements and argues that such agreements have many virtues. It offers analogical thinking as a case in point - this is the way that ordinary lawyers and indeed ordinary people often try to solve legal and ethical problems. For a system of law, analogical thinking, as a basis for incompletely theorized agreements, can be desirable because it is so much less sectarian, hubristic, and demanding than deep theories about (for example) equality, or liberty, or economic efficiency. Society is sometimes too sharply divided or confused about such theories to permit them to be foundations for judge-made law, which requires agreements among people who have little time and limited capacities, who must find a way to live together, who believe that values are plural and diverse, and who should show respect to one another’s most defining commitments.Hence incompletely theorized agreements play a large role in interpretation of both statutes and the Constitution itself; many of our basic rights are a product of such agreements.Lecture II opposes rules to rulelessness. Its principal goal is to point the way toward a more refined understanding of the ideal of the rule of law, one that sees a degree of particularity, and a degree of lawmaking at the point of application, as an important part of that ideal. It defends a form of casuistry and describes the potentially democratic foundations of the casuistical enterprise in law. The lecture begins by describing the distinctive advantages of rules and law via rules, especially as a means for providing a consensus on what the law is from people who disagree on so much else. It also discusses two attacks on decisions according to rule: the view that controversial political and moral claims always play a role in the interpretation of rules, and thus that rules are not what they appear to be; and the view that rules are obtuse, because they are too crude to cover diverse human affairs, and because people should not decide cases without closely inspecting the details of disputes. Giving special attention to the death penalty and broadcasting regulation, it offers two ways out of the dilemmas posed by rules and rulelessness: (a) a presumption in favor of privately adaptable rules, that is, rules that allocate entitlements without specifying outcomes, in an effort to promote goals associated with free markets; and (b) highly contextualized assessments of the virtues and pathologies of both options, in an effort to promote democratic goals of responsiveness and open participation.The lectures end with the suggestion that incompletely theorized agreements on particular outcomes play a large role not only in law, but also in many other sectors of social life, prominently including democratic discussion.

The Concept of Islamic International Criminal Law:A Comparative Study

Abstract: This text describes the principles of Islamic international criminal law and presents an exposition of existing Islamic international crimes The purpose of this study, comparing the system of international criminal law with that of Islamic international criminal law, is to evaluate certain important regulations in both these systems and examine them in the light of the growing development of international jurisprudence, thereby establishing that conflicts and apparent differences between the two systems are not principal but political, ideological, procedural and, more importantly, a result of specific interpretations of both legal systems This is important in the case of frequent international conflicts relating to the basic principles of human rights The book aims to serve as a source regarding the juridical rights of those who belong to different minority groups It also examines the possible co-operation and accommodation of the two systems in solving important questions surrounding the criminality, prosecution and punishment of criminals at an international level

Equality in law between men and women in the European Community

Abstract: Equality in law between men and women in the European Community is an integral part of the EC's social policy and crucial to its economic and social cohesion. This 15-Volume encyclopaedia analyzes the legal framework for equal opportunities which now exists in the Community due to the adoption of EC Directives on equal treatment, equal pay and social security, and to the work of the European Court of Justice in this area. It looks at how the EC Directives have been implemented and interpreted in each Member State, and at the other legislative and constitutional provisions affecting the principle of equality. All the principal legal provisions are reproduced or translated. Extracts from or digests of national case law are also included. Each volume is structured so that Member States's provisions on equality can be directly compared.

Principles and agents in social care: who's on the case and for whom?

Abstract: The economic theory of principal and agent is examined to assess its suitability for application to the world of social care Principal and agent theory hinges on the bases of two individuals, the principal, who is ill-informed and the agent, who is informed The principal hires the agent to act in such a way that the principal’s utility is improved Information is passed on to the principal from the agent to allow rational allocation of services at a reasonable fee The imbalance of information, however, causes problems in the relationship The asymmetry can result in moral hazard or adverse selection when the agent “misuses” the information at his/her disposal A considerable amount of literature exists in this area relating to the doctor-patient agency relationship Here the doctor and patient have interdependent utility functions they try to maximise The problem of supplier induced demand in fee for service systems has been found This is the problem of doctors unwarrantedly increasing demand to maintain their income or other entities in their utility functions eg prestige, a producer’s moral hazard It is believed that lessons from these situations can be applied to social care In social care we have an agency relationship between the care manager and their clients To assess this it is important to draw out the similarities and differences in this relationship In some respects social care agency relationships are more interesting and challenging than the doctor/patient relationship because of the number of “agency” models available – care managers, advocates and service brokers In this quest for understanding if such a relationship exists it is important to have information about care management itself to find out what exactly it is trying to do and how it functions This is helped by taking examples of its operation from Britain and the USA for various client groups The operation of the service is important to examine as this will allow us to understand how the service is coordinated and how budgets operate The final section of the paper examines predictions by this application and suggests a research agenda

Three Legal Traps for Small Businesses Engaged in International Commerce

Abstract: Today's trend toward globalization of economic relations has opened up many new opportunities for multinational businesses. Whether it is the simple purchase of a few parts from Japan or Latin America, or a major transborder relocation under the NAFTA treaty, small and medium-sized businesses are becoming increasingly more involved in international transactions. However, many business people will be surprised by the types of difficulties they encounter if their foreign business dealings break down, and they must seek protection of their financial interests through the international legal system. It is of little benefit to skillfully negotiate the numerous, complex aspects of a business transaction only to discover the agreement cannot be enforced through the existing international legal structure. Complications can arise when deciding where to try a case, determining which country's laws to apply, and getting the courts to enforce the law. Although more complex than any single case in which a small business is likely to find itself involved, the recently decided case of Panama Processes, S.A. v. Cities Service Co. (Panama Processes 1974, 1981, and 1990) illustrates some of the likely problems. In that case, Panama Processes successfully negotiated a contract to protect its flow of dividends from a jointly owned Brazilian corporation in which Panama was the minority shareholder. After several years of compliance, Cities Service Co., the majority shareholder, decided to void the agreement and cause the jointly owned corporation to cease paying dividends. Panama filed a number of suits to protect its financial position only to discover that its contract could not be enforced due to the omission of a few normally insignificant points. It is these few points, normally insignificant in a domestic situation but of pivotal importance in an international business arrangement, that are the subject of this article. Had Panama included even the least intrusive of these points in its original agreement, points to which Cities under the circumstances would have undoubtedly agreed, it could have enjoyed the fruits of its financial arrangements. Basically, the considerations that were omitted from the agreement between Panama and Cities were: (1) in the event that relations between the parties broke down, which court of law or other tribunal would referee their dispute, and (2) which set of rules or which country's laws would be used to determine the parties' respective rights and obligations? Choice of Forum The first question that will arise when international business people become involved in a legal dispute is, "Which legal system will be used to hear the controversy?" For example, in the Panama (1990) case, Panama and Cities had signed a contract in New York regarding the payment of dividends. But the corporation in which Panama and Cities were shareholders and which was to make actual payment of the dividends was incorporated in Brazil and did business in that country. In addition, Panama Processes was incorporated in the country of Panama, had its principal place of business in Switzerland at the time the contract was signed, and had moved its main offices to England by the time the dispute with Cities arose. On the other hand, Cities was incorporated in Delaware, had its principal place of business in New York at the time the agreement was signed, and had moved its main offices to Oklahoma at the time of the dispute with Panama. Therefore, it is at least arguable that a legal action regarding the enforcement of the agreement to pay dividends could take place in Brazil, Panama, Switzerland, England, New York, Delaware, or Oklahoma. Left to their individual preferences, the parties would normally prefer a court that was either conveniently located and with which they were familiar and felt comfortable, or that would favor their individual legal positions. For example, because of their geographical location, Panama might prefer a Swiss or British court, whereas Cities would prefer a New York or Oklahoma court; or, as actually happened in this case, Panama might seek legal protection available under the American legal system, whereas Cities sought legal advantages obtainable only in Brazil. …

Ayres versus Coase: An Attempt to Recover the Issue of Equality in Law and Economics

Abstract: The principal intellectual impetus behind progressive scholarship in business law' over the last twenty years has been provided by borrowings from economics.2 However, this impetus faces serious resistance from two directions. The first is traditional legal scholarship, which regards these borrowings as inappropriate to legal reasoning and finds comfort in so doing as these borrowings have tended to question formerly unquestionable beliefs. This type of 'intellectual friction'3 is unfortunate but is to be expected.4 Without wishing to deny the political importance of overcoming this friction, I regard it as theoretically uninteresting. More significant is the resistance to the economic analysis of business law mounted by another form of criticism of traditional legal scholarship, 'socio-legal scholarship'. Socio-legal scholarship tends to be associated with broadly left-wing political commitment because the explanations of bourgeois legal institutions which it provides show those institutions to be significantly irrational. I myself accept this in relation to business law since I believe that capitalist markets are poor allocative mechanisms and that the social relationships built upon them tend to be profoundly degrading. From this position, a rejection of law and economics may follow because law and economics scholarship is redolent with sometimes extreme right-wing political

Castles in the Air: Blanket Assent and theRevision of Article 2

Abstract: IntroductionIn Professor Grant Gilmore's view, the purpose of "general commercial legislation" is to clarify business law rather than to improve business practices.(1) The legislation is designed to "state as matter of law the conclusion which the business community apart from statute and as matter of fact gives to the transaction in any case."(2) Thus, the transaction's legal consequences will match the parties' expectations.The Uniform Commercial Code meets Gilmore's description; its "underlying purposes and policies" are facilitative rather than regulatory.(3) The obvious question for its drafters, therefore, is how to identify the conclusion that the business community gives to a particular transaction "apart from statute and as matter of fact."(4)Professor Lawrence Friedman points out that the original drafters of the Code did not base their work on studies of business practices:Devotion to business practice was deeply felt; nonetheless, it was window dressing at bottom. The Code did not start out with empirical studies of what business wanted, or with a theory of what the economy needed. Some Wall Street lawyers and businessmen were asked their opinions; but there were no real explorations of what was wrong (if anything) with the way law intersected the business world.(5)Friedman found the resulting Code "curiously old-fashioned," focused on problems of "disorder in doctrine, clashing case law, and what seemed to be unlovely and unsympathetic arrangements of statutes."(6) In the major revision of the Code that is now under way,(7) Reporters and Drafting Committees are again proceeding without empirical studies.(8) As a result, the product of their efforts may well be as academic(9) as the original version.Professor Karl Llewellyn, the "principal drafter"(10) of Article 2 of the Code, employed a drafting style that is, in theory, responsive to Friedman's criticism.(11) Llewellyn believed that the solution to any problem of commercial law is "immanent" in the commercial setting that gave rise to the problem.(12) Article 2 directs courts to discover and implement immanent solutions, deciding each case on the basis of a focused empirical inquiry.(13) The inquiry will produce information not only about the events that led directly to the transaction in dispute, but also about any relevant aspects of the parties' past dealings with each other and the practices of their industry. Thus, the lack of empirical studies at the Code drafting stage becomes irrelevant when the parties give the court a comprehensive education in the business realities that bear on their dispute.(14) Indeed, the resulting Code is far more flexible than, and therefore preferable to, any attempted codification of practices revealed in empirical studies.(15)The centerpiece of Llewellyn's methodology is the notion of agreement; the court's initial inquiry is into the bargain, if any, that the parties have made.(16) The Code definition of the term "agreement" makes clear that the parties' actual agreement, rather than any deemed agreement, is the focus of the inquiry.(17) And by incorporating implied terms and meanings, the definition also makes clear that the parties are to provide any relevant information about their past dealings and industry practices.(18)An Article 2 Study Group, whose recommendation led to the revision of the Article, echoes(19) the widely held view that Llewellyn's drafting style has stood the test of time,(20) and the draft revisions to date indicate that the Drafting Committee concurs.(21) Thus, all indications are that revised Article 2 will maintain Llewellyn's response to Friedman: a commercial code need not be based on ex ante empirical studies if it directs courts to discover commercial reality in the cases before them.At least one tenet of Llewellyn's thought is at odds with this approach, however. In thinking about contract formation by means of standard form documents, he conceived of the notion of "blanket assent. …