Spring 2015 Workshops
Please click here for most up-to-date information from the Center for Contract and Economic Organization on this workshop series.
February 9, 2015
Lisa Bernstein, Wilson-Dickinson Professor of Law, University of Chicago Law School
"Private Ordering, Social Capital, and Network Governance in Procurement Contracts: A Preliminary Exploration"
Abstract: The master agreements that nominally govern the transactions between Mid-Western Original Equipment Manufacturers and their suppliers, are not, for the most part, designed to create legal obligations. Rather they play a role in these transactions that is akin to the role played firm boundaries in the Coase Williamson theory of the firm—they create a space that is largely free of legal governance in which private order can flourish. This Article explores the ways that contract provisions, contract administration mechanisms, and other formal structures created by these firms, interact with forces created by repeat dealing as well as relational social capital and the positions of buyers and suppliers in the network of relevant firms (structural social capital) to support the creation and maintenance of cooperative contractual relationships. The description of the contracting relationships between OEMs and their suppliers suggests that unlike the relational contracts described by Stewart Macauly in his seminal Article, the relational contracts between OEMs and their suppliers are not informal—indeed they rely for their effectiveness on numerous formal contract administration mechanisms, mechanisms that are expensive to create and administer. Nevertheless, relational contracting is used in these markets because in this setting relational contracts offer three major advantages over armslength contracts. First, they create conditions that promote the growth of trust-based relationship-specific social capital that can, over time, be used to bond ever more complex undertakings. Second, the interpersonal interactions and information transfers encouraged by relational contracts create conditions under which both firms’ employees are more likely, over time, to engage in “brokerage,” that is, to come up with value creating future deals that only become visible once exchange between their respective firms has began. Finally, because the nonlegal sanctions that are built into these relationships can be imposed without filing a lawsuit and ending the contracting relationship, they can more adequately bond the many detailed interior promises (that in an outsourcing agreement may greatly effect its value) than can the prospect of court imposed damages that can only be credibly threatened or collected when the breach is large enough to make it worthwhile for the breached against party to end the parties’ contracting relationship.
February 11, 2015 (rescheduled from January 26, 2015)
Sarath Sanga, Academic Fellow, Columbia Law School
"The Contract Frontier: A Study of the Modern Joint Venture"
Abstract: How can corporations be competitors and partners at the same time? This is the dilemma of the modern joint venture. Joint ventures create an intrinsic fiduciary conflict because agents of each corporation owe a duty of undivided loyalty both to their own entities and—via the venture—to each other’s.
This paper presents a theory of how the modern joint venture resolves this conflict through contract. I argue that the key solution lies in organizing the joint venture’s business opportunities by: (1) creating a separate joint venture entity and (2) establishing a covenant not to compete. The covenant not to compete delineates the jointly-owned business opportunities from the opportunities that either co-venturer may independently pursue. It does this by replacing the default fiduciary standard of loyalty with a more precise fiduciary rule. The covenant not to compete also prohibits both partners from individually participating in the joint venture market. Instead, the joint venture market and all its opportunities are assigned to a separate joint venture entity. The joint venture entity quarantines the opportunities by taking ownership over the opportunities away from the co-venturers; it also solves the problem of “divided” loyalties because the entity has its own agents that are loyal to the entity and not to either co-venturer. The entity and the covenant not to compete together form a single organizational device: the modern joint venture.
I analyze this device in the context of a joint venture between The Boeing Company and Lockheed Martin, and show how the aerospace industry as a whole leverages it to support an immense network of joint ventures.
February 23, 2015
Tess Wilkinson-Ryan, Assistant Professor of Law and Psychology, University of Pennsylvania Law School
"The Common Sense of Contract Formation"
Abstract: Unlike torts or civil procedure or any area of public law, the rules of promissory exchange apply exclusively to parties who have manifested their assent to be bound. What parties know, and what parties think they know, about contract law affects their contract behavior and in some cases the legal status of their agreements. Drawing on a series of new experimental questionnaire studies, this paper does two things. First, it lays out what information and beliefs ordinary individuals have about how to form contracts with one another. These studies suggest that the colloquial understanding of contract law is almost entirely focused on formalization rather than actual assent, though the modern doctrine of contract formation takes the opposite stance. The second part of the paper tries to get at whether this misunderstanding matters. Whether and when do beliefs and misunderstandings about the nature of legal rules affect parties’ interactions with each other and with the legal system? We find that indeed information that a contract has been legally formed has behavioral effects, enhancing parties’ commitments to a deal even when there are no associated formal sanctions. However, we also document a series of situations in which misunderstandings have limited practical repercussions, because even parties who believe that legal obligation is about formalities take seriously the moral obligations associated with informal expectations, promises and exchanges. We conclude with brief speculations about the implications of these results for consumer contracts.
March 9, 2015
Sylvain Chassang, Professor of Economics and Public Affairs, Department of Economics and Woodrow Wilson School, Princeton University
"Rewards and Punishments: Informal Contracting through Social Preferences"
Abstract: This paper develops a novel positive model of informal contracting in which rewards and punishments are not determined by an ex ante optimal plan but instead express the ex post moral sentiments of the arbitrating party. We consider a subjective performance evaluation problem in which a principal can privately assess the contribution of an agent to the welfare of a broader group. In the absence of formal contingent contracts, the principal chooses ex post transfers that maximize her social preferences. We characterize the incentives induced by the principal's preferences, contrast them with ex ante optimal contracts, and derive novel testable predictions about the way externalities are internalized in informal settings.
March 30, 2015
Marina Halac, David W. Zalaznick Associate Professor of Business, Columbia Business School
"Contests for Experimentation"
Abstract: We study the design of contests for specific innovations when there is learning: contestants’ beliefs dynamically evolve about both the innovation’s feasibility and opponents’ success. Our model builds on exponential-bandit experimentation. We characterize contests that maximize the probability of innovation when the designer chooses how to allocate a prize and what information to disclose over time about contestants’ successes. A “public winner-takes-all contest” dominates public contests—those where any success is immediately disclosed—with any other prize-sharing scheme as well as winner-takes-all contests with any other disclosure policy. Yet, it is often optimal to use a “hidden equal-sharing contest”.
April 13, 2015
Eric Talley, The Rosalinde and Arthur Gilbert Foundation Professor of Law; Director, Berkeley Center for Law, Business, and the Economy, UC Berkeley Law
"Corporate Inversions and the Unbundling of Regulatory Competition"
Abstract: A sizable number of US public companies have recently executed “tax inversions” – acquisitions that move a corporation’s residency abroad while maintaining its listing in domestic securities markets. When appropriately structured, inversions replace American with foreign tax treatment of extraterritorial earnings, often at far lower effective rates. Regulators and politicians have reacted with alarm to the “inversionitis” pandemic, with many championing radical tax reforms. This paper questions the prudence of such extreme reactions, both on practical and on conceptual grounds. Practically, I argue that inversions are simply not a viable strategy for many firms, and thus the ongoing wave may abate naturally (or with only modest tax reforms). Conceptually, I assess the inversion trend through the lens of regulatory competition theory, in which jurisdictions compete not only in tax policy, but also along other dimensions, such as the quality of their corporate law and governance rules. I argue that just as US companies have a strong aversion to high tax rates, they have an affinity for robust corporate governance rules, a traditional strength of American corporate law. This affinity has historically given the US sufficient market power to keep taxes high without chasing off incorporations, because US law specifically bundles tax residency and state corporate law into a conjoined regulatory package. To the extent this market power remains durable, radical tax overhauls would be unhelpful (and even counterproductive). A more blameworthy culprit for inversionitis, I argue, can be found in an unlikely source: Securities Law. Over the last fifteen years, financial regulators have progressively suffused US securities regulations with mandates relating to internal corporate governance matters –traditionally the domain of state law. Those federal mandates, in turn, have displaced and/or preempted state law as a primary source of governance regulation for US-traded issuers. And, because US securities law applies to all listed issuers (regardless of tax residence), this displacement has gradually “unbundled” domestic tax law from corporate governance, eroding the US’s market power in regulatory competition. The most effective elixir for this erosion, then, may also lie in securities regulation. I propose two alternative reform paths: either (a) domestic exchanges should charge listed foreign issuers for their consumption of federal corporate governance policies; or (b) federal law should cede corporate governance back to the states by rolling back many of the governance mandates promulgated over the last fifteen years.
April 27, 2015
Florian Ederer, Assistant Professor of Economics, Yale School of Management, Cowles Foundation
"Promises and Expectations"
Abstract: We investigate why people keep their promises in the absence of external enforcement mechanisms and reputational effects. In a controlled laboratory experiment we show that exogenous variation of second order expectations (promisors' expectations about promisees' expectations that the promise will be kept) leads to a significant change in promisor behavior. We provide clean evidence that a promisor's aversion to disappoint a promisee's expectation leads her to keep her promise. We propose a simple theory of lexicographic promise keeping that is supported by our results and nests the findings of previous contributions as special cases.