Hollywood Deals: Soft Contracts for Hard Markets
USC Gould School of Law
March 5, 2014
Duke Law Journal, Forthcoming
USC Law and Economics Research Papers Series No. C12-9
USC Legal Studies Research Papers Series No. 12-15
Hollywood film studios, talent and other deal participants regularly commit to, and undertake production of, high-stakes film projects on the basis of unsigned “deal memos,” informal communications or draft agreements whose legal enforceability is uncertain. These “soft contracts” constitute a hybrid instrument that addresses a challenging transactional environment where neither formal contract nor reputation effects adequately protect parties against the holdup risk and project risk inherent to a film project. Parties negotiate the degree of contractual formality, which correlates with legal enforceability, as a proxy for allocating these risks at a transaction-cost savings relative to a fully formalized and specified instrument. Uncertainly enforceable contracts embed an implicit termination option that provides some protection against project risk while maintaining a threat of legal liability that provides some protection against holdup risk. Historical evidence suggests that soft contracts substitute for the vertically integrated structures that allocated these risks in the “studio system” era.
Number of Pages in PDF File: 54Accepted Paper Series
Date posted: July 29, 2012 ; Last revised: March 5, 2014
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