THE LAW&ECONOMICS OF INCOMPLETE CONTRACTS: THREE ESSATS.

THE LAW&ECONOMICS OF INCOMPLETE CONTRACTS: THREE ESSAYS The present thesis is essentially devoted to exploring the legal consequences of bounded rationality. This concept, due to H. Simon, constitutes one of the first erosion of classical economics. In particular: in the traditional economics framework, the agent is considered endowed with full knowledge, letting him to foresee all the future states of the world. However this assumption turned out to be unrealistic, making useless most of the predictions economists suppose to do. For this reason, it has been proposed to modify the classical assumptions about rationality, changing from full to bounded rationality, defined as “rational choice that takes into account the cognitive limitations of the decision maker of both knowledge and computational capacity”. Within this general framework, it arose the notion (and the theory) of incomplete contracts: that is, because people are not omniscient (again, bounded rational), they cannot foresee every contingency, and so, contracts should necessarily be incomplete. That is, they lack provisos for some state of the world, which either cannot be described or cannot be foreseen. However, while the traditional approach spoke about incompleteness of contracts, we think that this framework can be extended to all legal regulations, so to also include the incompleteness of the law itself. The thesis applies this conceptual framework to three different areas of the law: (i) general theory, (ii) civil law, (iii) administrative law. 1. The first essay (entitled “Incompleteness of the Law and the Role of Standards in a Law&Economics Perspective”), by discussing the long-standing question about rules and standards, argues (presenting two recent economic models) that non-specific norms can cope with the issue of incompleteness. Furthermore, it tries to develop and extend one of the two models, in order to find a rationale for the use of “principles” (meant in the legal-technical meaning). 2. The second essay focuses on the notion of authority (better, abuse of) in civil law and shows that the Italian Supreme Civil Court reach conclusions that are consistent with the economic theory. In particular, authority has been conceived as a solution for incomplete contracts. However, some scholars pointed out that also the use (and the abuse) of authority is affected by bounded rationality: indeed, if we are not able to foresee every contingency in a contract, we are not as well able to foresee and say when authority is exercised abusively or not. Economic scholars (D. Kreps) have proposed to use, perhaps using a non-technical language, “general principles” to constrain the (in essence) discretional exercise of authority. Interestingly, Italian case-law resorts to the “good faith clause” to cope with the same issue. So, at the end, by stressing the similarity between the “general principles” and the “good faith clause”, one can see that the proposals by economists find a legal counterpart in the legal field. 3. The third essay focuses on a hot topic of administrative law: that is the choice between providing services and works internally (in house) or externally (by recurring to the market). This issue has been discussed in Italy during the last twenty years and has received the attention of the rule-maker, which passed several laws on this subject. The essay argues that, by applying the incomplete contracts framework, it can be criticised the general view of the Italian rule-maker. Specifically, the in-house should not be considered as an exception, on the contrary -in some cases- it is socially superior to the outsourcing. THE LAW&ECONOMICS OF INCOMPLETE CONTRACTS: THREE ESSAYS The present thesis is essentially devoted to exploring the legal consequences of bounded rationality. This concept, due to H. Simon, constitutes one of the first erosion of classical economics. In particular: in the traditional economics framework, the agent is considered endowed with full knowledge, letting him to foresee all the future states of the world. However this assumption turned out to be unrealistic, making useless most of the predictions economists suppose to do. For this reason, it has been proposed to modify the classical assumptions about rationality, changing from full to bounded rationality, defined as “rational choice that takes into account the cognitive limitations of the decision maker of both knowledge and computational capacity”. Within this general framework, it arose the notion (and the theory) of incomplete contracts: that is, because people are not omniscient (again, bounded rational), they cannot foresee every contingency, and so, contracts should necessarily be incomplete. That is, they lack provisos for some state of the world, which either cannot be described or cannot be foreseen. However, while the traditional approach spoke about incompleteness of contracts, we think that this framework can be extended to all legal regulations, so to also include the incompleteness of the law itself. The thesis applies this conceptual framework to three different areas of the law: (i) general theory, (ii) civil law, (iii) administrative law. 1. The first essay (entitled “Incompleteness of the Law and the Role of Standards in a Law&Economics Perspective”), by discussing the long-standing question about rules and standards, argues (presenting two recent economic models) that non-specific norms can cope with the issue of incompleteness. Furthermore, it tries to develop and extend one of the two models, in order to find a rationale for the use of “principles” (meant in the legal-technical meaning). 2. The second essay focuses on the notion of authority (better, abuse of) in civil law and shows that the Italian Supreme Civil Court reach conclusions that are consistent with the economic theory. In particular, authority has been conceived as a solution for incomplete contracts. However, some scholars pointed out that also the use (and the abuse) of authority is affected by bounded rationality: indeed, if we are not able to foresee every contingency in a contract, we are not as well able to foresee and say when authority is exercised abusively or not. Economic scholars (D. Kreps) have proposed to use, perhaps using a non-technical language, “general principles” to constrain the (in essence) discretional exercise of authority. Interestingly, Italian case-law resorts to the “good faith clause” to cope with the same issue. So, at the end, by stressing the similarity between the “general principles” and the “good faith clause”, one can see that the proposals by economists find a legal counterpart in the legal field. 3. The third essay focuses on a hot topic of administrative law: that is the choice between providing services and works internally (in house) or externally (by recurring to the market). This issue has been discussed in Italy during the last twenty years and has received the attention of the rule-maker, which passed several laws on this subject. The essay argues that, by applying the incomplete contracts framework, it can be criticised the general view of the Italian rule-maker. Specifically, the in-house should not be considered as an exception, on the contrary -in some cases- it is socially superior to the outsourcing. THE LAW&ECONOMICS OF INCOMPLETE CONTRACTS: THREE ESSAYS The present thesis is essentially devoted to exploring the legal consequences of bounded rationality. This concept, due to H. Simon, constitutes one of the first erosion of classical economics. In particular: in the traditional economics framework, the agent is considered endowed with full knowledge, letting him to foresee all the future states of the world. However this assumption turned out to be unrealistic, making useless most of the predictions economists suppose to do. For this reason, it has been proposed to modify the classical assumptions about rationality, changing from full to bounded rationality, defined as “rational choice that takes into account the cognitive limitations of the decision maker of both knowledge and computational capacity”. Within this general framework, it arose the notion (and the theory) of incomplete contracts: that is, because people are not omniscient (again, bounded rational), they cannot foresee every contingency, and so, contracts should necessarily be incomplete. That is, they lack provisos for some state of the world, which either cannot be described or cannot be foreseen. However, while the traditional approach spoke about incompleteness of contracts, we think that this framework can be extended to all legal regulations, so to also include the incompleteness of the law itself. The thesis applies this conceptual framework to three different areas of the law: (i) general theory, (ii) civil law, (iii) administrative law. 1. The first essay (entitled “Incompleteness of the Law and the Role of Standards in a Law&Economics Perspective”), by discussing the long-standing question about rules and standards, argues (presenting two recent economic models) that non-specific norms can cope with the issue of incompleteness. Furthermore, it tries to develop and extend one of the two models, in order to find a rationale for the use of “principles” (meant in the legal-technical meaning). 2. The second essay focuses on the notion of authority (better, abuse of) in civil law and shows that the Italian Supreme Civil Court reach conclusions that are consistent with the economic theory. In particular, authority has been conceived as a solution for incomplete contracts. However, some scholars pointed out that also the use (and the abuse) of authority is affected by bounded rationality: indeed, if we are not able to foresee every contingency in a contract, we are not as well able to foresee and say when authority is exercised abusively or not. Economic scholars (D. Kreps) have proposed to use, perhaps using a non-technical language, “general principles” to constrain the (in essence) discretional exercise of authority. Interestingly, Italian case-law resorts to the “good faith clause” to cope with the same issue. So, at the end, by stressing the similarity between the “general principles” and the “good faith clause”, one can see that the proposals by economists find a legal counterpart in the legal field. 3. The third essay focuses on a hot topic of administrative law: that is the choice between providing services and works internally (in house) or externally (by recurring to the market). This issue has been discussed in Italy during the last twenty years and has received the attention of the rule-maker, which passed several laws on this subject. The essay argues that, by applying the incomplete contracts framework, it can be criticised the general view of the Italian rule-maker. Specifically, the in-house should not be considered as an exception, on the contrary -in some cases- it is socially superior to the outsourcing. THE LAW&ECONOMICS OF INCOMPLETE CONTRACTS: THREE ESSAYS The present thesis is essentially devoted to exploring the legal consequences of bounded rationality. This concept, due to H. Simon, constitutes one of the first erosion of classical economics. In particular: in the traditional economics framework, the agent is considered endowed with full knowledge, letting him to foresee all the future states of the world. However this assumption turned out to be unrealistic, making useless most of the predictions economists suppose to do. For this reason, it has been proposed to modify the classical assumptions about rationality, changing from full to bounded rationality, defined as “rational choice that takes into account the cognitive limitations of the decision maker of both knowledge and computational capacity”. Within this general framework, it arose the notion (and the theory) of incomplete contracts: that is, because people are not omniscient (again, bounded rational), they cannot foresee every contingency, and so, contracts should necessarily be incomplete. That is, they lack provisos for some state of the world, which either cannot be described or cannot be foreseen. However, while the traditional approach spoke about incompleteness of contracts, we think that this framework can be extended to all legal regulations, so to also include the incompleteness of the law itself. The thesis applies this conceptual framework to three different areas of the law: (i) general theory, (ii) civil law, (iii) administrative law. 1. The first essay (entitled “Incompleteness of the Law and the Role of Standards in a Law&Economics Perspective”), by discussing the long-standing question about rules and standards, argues (presenting two recent economic models) that non-specific norms can cope with the issue of incompleteness. Furthermore, it tries to develop and extend one of the two models, in order to find a rationale for the use of “principles” (meant in the legal-technical meaning). 2. The second essay focuses on the notion of authority (better, abuse of) in civil law and shows that the Italian Supreme Civil Court reach conclusions that are consistent with the economic theory. In particular, authority has been conceived as a solution for incomplete contracts. However, some scholars pointed out that also the use (and the abuse) of authority is affected by bounded rationality: indeed, if we are not able to foresee every contingency in a contract, we are not as well able to foresee and say when authority is exercised abusively or not. Economic scholars (D. Kreps) have proposed to use, perhaps using a non-technical language, “general principles” to constrain the (in essence) discretional exercise of authority. Interestingly, Italian case-law resorts to the “good faith clause” to cope with the same issue. So, at the end, by stressing the similarity between the “general principles” and the “good faith clause”, one can see that the proposals by economists find a legal counterpart in the legal field. 3. The third essay focuses on a hot topic of administrative law: that is the choice between providing services and works internally (in house) or externally (by recurring to the market). This issue has been discussed in Italy during the last twenty years and has received the attention of the rule-maker, which passed several laws on this subject. The essay argues that, by applying the incomplete contracts framework, it can be criticised the general view of the Italian rule-maker. Specifically, the in-house should not be considered as an exception, on the contrary -in some cases- it is socially superior to the outsourcing. THE LAW&ECONOMICS OF INCOMPLETE CONTRACTS: THREE ESSAYS The present thesis is essentially devoted to exploring the legal consequences of bounded rationality. This concept, due to H. Simon, constitutes one of the first erosion of classical economics. In particular: in the traditional economics framework, the agent is considered endowed with full knowledge, letting him to foresee all the future states of the world. However this assumption turned out to be unrealistic, making useless most of the predictions economists suppose to do. For this reason, it has been proposed to modify the classical assumptions about rationality, changing from full to bounded rationality, defined as “rational choice that takes into account the cognitive limitations of the decision maker of both knowledge and computational capacity”. Within this general framework, it arose the notion (and the theory) of incomplete contracts: that is, because people are not omniscient (again, bounded rational), they cannot foresee every contingency, and so, contracts should necessarily be incomplete. That is, they lack provisos for some state of the world, which either cannot be described or cannot be foreseen. However, while the traditional approach spoke about incompleteness of contracts, we think that this framework can be extended to all legal regulations, so to also include the incompleteness of the law itself. The thesis applies this conceptual framework to three different areas of the law: (i) general theory, (ii) civil law, (iii) administrative law. 1. The first essay (entitled “Incompleteness of the Law and the Role of Standards in a Law&Economics Perspective”), by discussing the long-standing question about rules and standards, argues (presenting two recent economic models) that non-specific norms can cope with the issue of incompleteness. Furthermore, it tries to develop and extend one of the two models, in order to find a rationale for the use of “principles” (meant in the legal-technical meaning). 2. The second essay focuses on the notion of authority (better, abuse of) in civil law and shows that the Italian Supreme Civil Court reach conclusions that are consistent with the economic theory. In particular, authority has been conceived as a solution for incomplete contracts. However, some scholars pointed out that also the use (and the abuse) of authority is affected by bounded rationality: indeed, if we are not able to foresee every contingency in a contract, we are not as well able to foresee and say when authority is exercised abusively or not. Economic scholars (D. Kreps) have proposed to use, perhaps using a non-technical language, “general principles” to constrain the (in essence) discretional exercise of authority. Interestingly, Italian case-law resorts to the “good faith clause” to cope with the same issue. So, at the end, by stressing the similarity between the “general principles” and the “good faith clause”, one can see that the proposals by economists find a legal counterpart in the legal field. 3. The third essay focuses on a hot topic of administrative law: that is the choice between providing services and works internally (in house) or externally (by recurring to the market). This issue has been discussed in Italy during the last twenty years and has received the attention of the rule-maker, which passed several laws on this subject. The essay argues that, by applying the incomplete contracts framework, it can be criticised the general view of the Italian rule-maker. Specifically, the in-house should not be considered as an exception, on the contrary -in some cases- it is socially superior to the outsourcing.