Deals: The Economic Structure of Transactions and Contracting
Even though transactions vary in their details, the fundamental lesson of the Deals course is that all transactions present common economic problems. For example, the seller is likely to have more information than the buyer, and this imbalance of information is likely to reduce the buyer's enthusiasm for the deal (and thus the price the buyer is willing to pay). In addition to identifying this sort of common problem, the course offers a menu of solutions. The buyer can ask the seller to share information, for instance, through due diligence backed by an indemnity. Or the buyer can pay a contingent purchase price, offering a partial payment up front and more later if things go well. Or the buyer can depend on a third party, such as an investment bank, to vouch for the quality of what is being sold. In exploring these alternatives, the course draws on option theory, moral hazard, adverse selection, rent-seeking, and other economic theories and applies them to real deals. Students are asked to assume the role of a deal lawyer and explain how they might tackle the problems presented.
The course has both positive and normative goals. We hope to learn more about the patterns of contractual governance that have emerged with respect to different types of transactions: How do parties order their commercial interactions? Perhaps more importantly, we hope to be able to build on that learning to teach how parties may more effectively govern their relations: How should parties order their commercial transactions?
The course is comprised of two parts, focusing principally on an analysis of contract documents that memorialize a variety of interfirm business transacitons. The first part, involving four to six weeks, is designed to introduce students to the economic tools necessary to evaluate alternative contractual regimes, including transaction costs, information economics, risk sharing and incentives, property rights, and finance. Students also work through some of the existing empirical work on contracting regimes.
The second half of the course applies the tools developed in the first part, culminating in group projects that consider different real world transactions, with the particular transactions selected to give students a range of subject matters in order to highlight a common set of problems that arises in multiple settings. Each group, comprised of approximately a dozen Columbia Law and Business School students, is given a thick stack of documents from an actual transaction, which might include a financing for a movie, a merger of public companies, or a venture capital deal, among others. The students are asked to identify the economic problems in their deal and the solutions the parties used. Were these the right solutions? Why were they chosen, instead of alternatives? The students present their deal to the class. Then, in the next class session, the expert practitioner or principal who actually participated in the deal (usually a Columbia Law School graduate) comes in to explain what really happened and why. The goal is to give students the opportunity to test how the class approach corresponds to the way those who "did the deal" understood it.
The Deals course is one of the most popular in Columbia Law School, with over 150 students vying for approximately 50 available spots.
The Program and its goals are described in more detail in this article, written by Victor Fleischer, the first Research Fellow in Transactional Studies and currently a professor at UCLA Law School.