A Theory of Evidence-Based Ruling in Contract Enforcement

We propose a model to analyze how evidence-based rulings affect incentive contract formation and welfare. A contract enforcer is evidence-based if his rulings are fully backed by objective evidence and are independent of his subjective beliefs. We show that evidence-based rulings play a vital role in preserving contractual incentives even if the enforcer is not biased. However, its implementation also leads to costlier litigation. The tradeoff between the incentives benefit and the legal costs determines which enforcement regime is preferable. We apply the theory to contrast public courts with private arbitrators, and discuss their specific roles in contract enforcement