Forum Selection in International Business Contracts: Home Bias Portfolio Puzzle and Managerial Moral Hazard

24 Pages Posted: 22 Nov 2001

See all articles by Moshe Bar-Niv (Burnovski)

Moshe Bar-Niv (Burnovski)

Interdisciplinary Center (IDC) Herzliyah - Radzyner School of Law

David Feldman

Banking and Finance, UNSW Business School, UNSW Sydney; Financial Research Network (FIRN)

Multiple version iconThere are 2 versions of this paper

Date Written: December 12, 2003

Abstract

We provide an economic analysis of forum selection in international business contracts. International business contracts or multi-state transactions within federally structured countries might be subject to more than one sovereign adjudication system. In case of conflict between the transacting parties, the appropriate tribunal must be identified. We examine the question of business firms' optimal choice of the forums to adjudicate future business disputes. We extend the investment model approach to litigation, by applying a Portfolio Theory type analysis. We show that firms that prefer higher expected income and lower income volatility are better off diversifying the forums under which they litigate business disputes. This stands in contrast to real-world business practice that consistently shows a clear preference to selecting the home court and legal system to settle international business disputes. In a fraction of the cases, both parties gain by selecting a certain forum, because of specialization for example, and it becomes optimal to ignore diversification. In most cases, however, the relevant factors that affect forum selection are zero sum and priced ex ante. Court bias, for example. Once priced, there is no incentive to disregard diversification. We hypothesize that several factors such as managerial moral hazard explain the real world behavior of firms: managers are less likely to be blamed, ex post, for choosing the home court. We suggest that, as international barriers decline and international trade grows, firms will diversify the forums in which they adjudicate international business disputes.

Key Words: forum-selection, international-business transactions, contracts, portfolio diversification, home bias, managerial moral hazard, investment approach to litigation, managerial discretion

Keywords: forum-selection, international-business transactions, contracts, portfolio diversification, home bias, managerial moral hazard, investment approach to litigation, managerial discretion

JEL Classification: F29, F39, G11, G39, K49, L19

Suggested Citation

Bar-Niv, Moshe and Feldman, David, Forum Selection in International Business Contracts: Home Bias Portfolio Puzzle and Managerial Moral Hazard (December 12, 2003). Available at SSRN: https://ssrn.com/abstract=291339 or http://dx.doi.org/10.2139/ssrn.291339

Moshe Bar-Niv

Interdisciplinary Center (IDC) Herzliyah - Radzyner School of Law ( email )

P.O. Box 167
Herzliya, 46150
Israel
+972-9-952-7220 (Phone)
+972-9-951-3075 (Fax)

David Feldman (Contact Author)

Banking and Finance, UNSW Business School, UNSW Sydney ( email )

UNSW Sydney, NSW 2052
Australia
+61 2 9385 5748 (Phone)
+61 2 9385 6347 (Fax)

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

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