Coase-Sandor Institute for Law & Economics Research Paper Series

Publication Date

2025

Publication Title

Coase-Sandor Working Paper Series in Law and Economics

Abstract

An implicit binary underlies most academic thinking about commercial and corporate contracts. To judge from the theory literature, such agreements consist of just two kinds of terms: those that are negotiated and priced and those that are boilerplate. But on-the-ground realities don’t square with the picture of contract production that the standard assumption yields. That picture can’t easily explain, for example, why sophisticated parties regularly spend large sums quarreling over terms, nor is it compatible with commonly expressed attitudes of negotiating triumph or dismay.

This Article develops a new analytical category that can explain these and other empirical regularities and by so doing refine optimal contract theory. What we call “precedent” terms are economically meaningful provisions that vary from contract to contract among deals of the same type but that do not affect price. They emerge when the costs of standardizing a dimension of the parties’ relationship outweigh the benefits but parties can’t effectively price term variation. Under these conditions, parties to a contract negotiation may do best by anchoring on, while contesting the weight and meaning of, previously struck deals. They may use the past as precedent. Beyond developing a general account of precedent terms, we consider their role in the production of one important transactional form: the leveraged loan. Interviews with participants in the loan market suggest that precedent terms amount to a large fraction of the variation in leveraged loans. To the extent that other kinds of deals are like leveraged loans in this sense, commercial and corporate law scholars should incorporate precedent terms, and what they mean for contracting, into their teaching and research.

Number

25-20

Download


Included in

Law Commons

Share

COinS