Active Courts and Menu Contracts∗

Abstract. We describe and analyze a contractual environment that allows a role for an active court. An active Court can improve on the outcome that the parties would achieve without it. The institutional role of the Court is to maximize the parties ’ welfare under a veil of ignorance. This role of active Courts exists even if “menu contracts ” are negotiated between the informed buyer and the uninformed seller at an ex-ante stage (before investment are sunk). We find that if we maintain the assumption that one of the potential objects of trade is not contractible ex-ante, then active Courts can strictly enhance the contracting parties ’ ex-ante welfare by destroying the unique inefficient pooling equilibrium. If however we let all “widgets ” be contractible ex-ante, then multiple equilibria obtain. In this case the role for an active Court is to ensure that inefficient pooling equilibria do not exist alongside the superior ones in which separation occurs