Standardization and Innovation in Corporate Contracting (or 'the Economics of Boilerplate')

Posted: 18 Jul 1997

See all articles by Marcel Kahan

Marcel Kahan

New York University School of Law; European Corporate Governance Institute

Michael Klausner

Stanford Law School; European Corporate Governance Institute (ECGI)

Abstract

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

Suggested Citation

Kahan, Marcel and Klausner, Michael D., Standardization and Innovation in Corporate Contracting (or 'the Economics of Boilerplate'). Available at SSRN: https://ssrn.com/abstract=10522

Marcel Kahan (Contact Author)

New York University School of Law ( email )

40 Washington Square South
New York, NY 10012-1099
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212-998-6268 (Phone)
212-995-4341 (Fax)

European Corporate Governance Institute ( email )

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Belgium

Michael D. Klausner

Stanford Law School ( email )

559 Nathan Abbott Way
Stanford, CA 94305-8610
United States
650-723-6433 (Phone)
650-725-0253 (Fax)

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

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