Agency Law
y March 2001
Agency Law and Contract Formation
ISSN 1045-6333
AGENCY LAW AND CONTRACT FORMATION
Eric Rasmusen
Discussion Paper No. 323 05/2001
Harvard Law School Cambridge, MA 02138
The Center for Law, Economics, and Business is supported by a grant from the John M. Olin Foundation.
This paper can be downloaded without charge from: The Harvard John M. Olin Discussion Paper Series: http://www.law.harvard.edu/programs/olin_center/
March 2001
Agency Law and Contract Formation
JEL Class: K12
Agency Law and Contract Formation
Eric Rasmusen*
Abstract A number of issues in the common law arise when agents make contracts on behalf of principals. Should a principal be bound when his agent makes a contract with some third party on his behalf which the principal would immediately wish to disavow? The tradeoffs resemble those in tort, so the least-cost-avoider principle is useful for deciding when contracts are valid, and may be the underlying logic behind a number of different doctrines in agency law. In particular, an efficiency explanation can be found for the undisclosed principal rule, under which the principal is bound even when the third party is unaware that the agent is acting as an agent.
*
Olin Senior Research Fellow, Harvard Law School, and Professor of Business Economics and Public Policy and Sanjay Subhedar Fellow, Kelley School of Business, Indiana University.
March 2001
Agency Law and Contract Formation
Agency Law and Contract Formation
Eric Rasmusen* © 2001 Eric Rasmusen. All rights reserved.
TABLE OF CONTENTS I II. III. IV. INTRODUCTION……………………………………………………….…..1 THE LAW OF AGENCY……………………………………………..……..4 A MODEL OF CONTRACTS MADE BY AGENTS……………………......9 APPLICATION OF THE LEAST-COST-AVOIDER PRINCIPLE………...14 A. The Sources of Authority ………………………………………….…...14 1. Actual Express Authority……………………..…………….….15 2. Actual Implied Authority………….………………...………....15 3. Apparent
Agency Law and Contract Formation
ISSN 1045-6333
AGENCY LAW AND CONTRACT FORMATION
Eric Rasmusen
Discussion Paper No. 323 05/2001
Harvard Law School Cambridge, MA 02138
The Center for Law, Economics, and Business is supported by a grant from the John M. Olin Foundation.
This paper can be downloaded without charge from: The Harvard John M. Olin Discussion Paper Series: http://www.law.harvard.edu/programs/olin_center/
March 2001
Agency Law and Contract Formation
JEL Class: K12
Agency Law and Contract Formation
Eric Rasmusen*
Abstract A number of issues in the common law arise when agents make contracts on behalf of principals. Should a principal be bound when his agent makes a contract with some third party on his behalf which the principal would immediately wish to disavow? The tradeoffs resemble those in tort, so the least-cost-avoider principle is useful for deciding when contracts are valid, and may be the underlying logic behind a number of different doctrines in agency law. In particular, an efficiency explanation can be found for the undisclosed principal rule, under which the principal is bound even when the third party is unaware that the agent is acting as an agent.
*
Olin Senior Research Fellow, Harvard Law School, and Professor of Business Economics and Public Policy and Sanjay Subhedar Fellow, Kelley School of Business, Indiana University.
March 2001
Agency Law and Contract Formation
Agency Law and Contract Formation
Eric Rasmusen* © 2001 Eric Rasmusen. All rights reserved.
TABLE OF CONTENTS I II. III. IV. INTRODUCTION……………………………………………………….…..1 THE LAW OF AGENCY……………………………………………..……..4 A MODEL OF CONTRACTS MADE BY AGENTS……………………......9 APPLICATION OF THE LEAST-COST-AVOIDER PRINCIPLE………...14 A. The Sources of Authority ………………………………………….…...14 1. Actual Express Authority……………………..…………….….15 2. Actual Implied Authority………….………………...………....15 3. Apparent
References: American Law Institute (1933) Institute, 1933. Fischel, Daniel & Alan Sykes (1996) "Corporate Crime", 350. Rasmusen, Eric & Ian Ayres (1993) "Mutual Versus Unilateral Mistake in Contracts," Legal Studies, (June 1993), 22: 309-343.