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Authors

Enrico Baffi

Abstract

In this paper the author has tried to find different market failure in situations where many scholars think that the market doesn't work well. He has considered two hypotheses but the idea has surely a wider application. In the author's opinion some clauses are similar to those known in legal terms as "standard" Such clauses are often vague, imprecise, give judges a great discretionary power and need a lot of precedents to be clarified. In some situations a firm could insert a clause of this kind, and this would be efficient, but the problem is that that firm bears all the cost of the clarification of the clause. The other firms can wait and exploit learning externalities. The problem of these clauses is that are socially efficient but they are public goods in economics sense. It's impossible to avoid the situation wherein anther firm uses the clause once it has been clarified. So the first firm which has the idea of inserting the clause will decide not to spend money for the clause and it will start to hope that some other firm will produce the clause. It also wants to behave as a free rider in the same way as other firms. But in this way the efficient clauses are not produced. With mandatory rules the clause is produced according to Kaldor-Hicks efficiency criterion and there is the chance that many firms pay something toward it. For instance in case of the standard ofgood faith, if only the first firm introduces this clause it had to pay a lot ofmoney for litigation and it could suffer a loss in terms of reputation so the legal system introduces a mandatory rules. The same problem is with the clause of corporate charter. The author hence argues that the idea has many and wide applications.

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