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American Law and Economics Review V6 N2 2004 (369-409)
American Law and Economics Review Vol. 6 No. 2, © American Law and Economics Association 2004; all rights reserved.

Agency Law and Contract Formation

Eric Rasmusen

Indiana University

Send correspondence to: Eric Rasmusen, Department of Business Economics and Public Policy, Kelley School of Business, Indiana University; 1309 East Tenth Street, Bloomington, IN 47450; Fax: (812) 855-3354; E-mail: erasmuse{at}indiana.edu.

Various 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 on his behalf that he would immediately wish to disavow? The tradeoffs resemble those in tort, so the least-cost avoider principle is useful for deciding which agreements are binding and can unify a number of different doctrines in agency law. In particular, an efficiency explanation can be found for the undisclosed-principal rule, under which the agent's agreement binds the principal even when the third party with whom the contract is made is unaware that the agent is acting as an agent.


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