MODULAR CONTRACTS

Department: Finance

Speaker: Jason Donaldson (USC)

Room: T027

MODULAR CONTRACTS

Abstract

Real-world contracts are written as collections of clauses that courts interpret
and evaluate separately. Standard theories, however, suppress much of the internal
structure of contracts, representing them as mappings from, typically,
output to transfers. In this paper, we develop a theory of contracts starting
with the (formal) language they are written in. Clauses, which serve as the units
of evaluation by courts, are modeled as groups of sentences in the language.
Courts assess clauses based on data, which might not be perfectly observed but
might be shuffled, permutations of the true data. We show that, as a result,
how sentences are grouped into clauses can determine contractual outcomes,
explaining phenomena familiar in practice but difficult to capture in standard
models, including loopholes, complexity risk, contractual landmines, incompleteness,
and evidentiary conservatism. The framework speaks to how modular
structure matters for how contracts