Abstract
Judges become ambitious decision makers when they face appellate review. This paper applies a contract theoretic perspective to the behavior of self-interested trial judges in a two-level court system and analyzes how different judicial stereotypes affect contracting in “the shadow of” the court. Confronted with the factual ambiguity of a case, maximizing judges pursue an (privately) optimal strategy and tip the scales of the trial outcome. The model reveals that careerist judges will deliberately allow for a certain probability of judicial error in their decisions to pursue “self-advertisement” at the appeal court. Furthermore, the strongest fact-finding judge is tempted by in-trial settlements to evade the risk of appellate review, and does not foster contract verifiability to the desirable extent. Our implications put into perspective the function of appellate courts to promote court accuracy. Additionally, a judicial tendency to conclude lawsuits through in-court settlements may strain contract output.
Acknowledgments
The author is grateful for the support and advice of Michael Berlemann, Mariusz Golecki, Tobias Hlobil, Roland Kirstein, Baptiste Massenot and two anonymous referees. The author has also benefitted much from the suggestions made by conference participants of the German Law and Economics Association in Magdeburg, October 2012, of the Scottish Economic Society in Perth, April 2013, of the Workshop on the Economic Analysis of Litigation in Catania, June 2014, and of the Spanish Law and Economics Association in Malaga, June 2014.
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