Standardization and Innovation in Corporate Contracting (or 'the Economics of Boilerplate')
Posted: 18 Jul 1997
This Article presents a theoretical, institutional, and empirical analysis of how increasing returns -- specifically, learning externalities and network externalities -- influence standardization, customization, and innovation in corporate contracts. In the theoretical section, we analyze how common use of a contract term can create learning and network externalities; how these externalities can influence the balance of standardization, customization, and innovation in contracts; and how such externalities can lead to suboptimal contract provisions. We also discuss how internal learning and network effects can result in switching costs. Finally, we examine how underwriters and law firms may ameliorate some the potential adverse effects of learning and network externalities. In the empirical section, we analyze the evolution of event risk covenants, commonly included in bond indentures in the late 1980s. We find moderate to strong support for the hypothesis that learning or network externalities as well as switching costs were present in these covenants and that underwriters significantly influenced firms' contracting choices.
JEL Classification: K12
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