Essays in law and economics and vertical integration

This dissertation contains an essay on the role of courts in the dynamic efficiency of common law, an essay on the effect of litigation on the optimal combination of clauses written in contracts and an essay on the decision of a monopoly to vertically integrate and sabotage its downstream competition in a regulated industry.; In the first essay I develop a model that precisely determines when and how forward-looking courts should set and reform legal rules. I explicitly take into account that the optimal rules most likely are not the same for all periods of time, courts can only rule at trials and their enforcement strategies determine the litigation strategies of the parties in conflict. I show that in general, courts should set those rules which are optimally adapted to the states of nature most likely to occur before the next trial takes place. I also show that courts should bias the unconstrained first-best rules for society in order to provide incentives to the parties to correct an inefficient frequency of trials. In addition, the model predicts that: (1) there always exists a distribution of the litigation expenses between the parties in conflict which generates an optimal frequency of trials; (2) if the total litigation expenses are above a certain threshold then trials take place too infrequently.; In the second essay I determine the optimal combination of precise and vague clauses written in contracts when the parties face writing and enforcement costs, the second ones in the form of litigation. I show that the parties may prefer to write vague instead of precise clauses not only because they are cheaper to write but also because they are cheaper to enforce. I extend Battigalli and Maggi (2002) to model the decision of a principal who chooses clauses to describe the actions that an agent has to perform. As both players observe nature imperfectly they may call for a court to determine whether the agent performed the right action. I show that the principal tends to sue the agent more frequently when a task is described with a precise instead of a vague clause. The reason is that, with precise clauses, the frequency of litigation increases with the value of the task that is described because a smaller discrepancy in the beliefs of the players is enough to trigger a dispute, but with vague clauses, that frequency decreases with the value of the task because the probability that the agent performs the right action increases with the value of the task. The direct implication is that vague and not precise clauses are used to describe the most important tasks of the contract.; In the third essay we (together with Alexander Galetovic) study the decision of a monopolist to vertically integrate and sabotage its rivals (increase their production costs). The monopolist produces an essential input for the competitive downstream industry. The charge of the input is regulated. Contrary to most of the literature, we allow for free entry into the downstream segment, so that prices equal long-run average costs. We find the following: First, sabotage does not pay when diseconomies of scope are large, or the subsidiary's market share is small. Second, when sabotage pays, and the subsidiary coexists with rivals in equilibrium, optimal sabotage increases with the subsidiary's market share and scope economies. On the other hand, when the essential facility optimally sabotages to exclude rivals, the intensity of sabotage falls with economies of scope. Third, unless the subsidiary is implausibly more efficient than independent firms, vertical integration never benefits consumers.