What is it about?
This article explores the effects of two classes of contractual performance clauses in the context of a compensatory damages legal institution. Specifically, we examine action versus deliverables performance clauses in three environments of qualitatively increasing uncertainty: perfect information, risk, and ambiguity. Our purpose is to investigate the interaction between the degree of uncertainty facing the parties, the types of performance clauses they can choose, and their actual performance given their contract. This is all done under the auspices of compensatory damages as the legal institution used to resolve breaches of contract.
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Perspectives
The primary papers in the management stream on this topic argue that, as firms become more experienced in their dealings with each other (and with the joint activity in question) the "marginal cost" of adding a clause to their contracts decreases. Therefore, the reasoning goes, we should observe more "detailed" contracts between more experienced firms. Our earlier empirical investigation, Ryall and Sampson (2009), shows that an important source of content variation in contracts across firms of different experience levels is not only the number of clauses used but also the type of clause used. The simple marginal-cost-of-a-clause argument cannot explain this feature of the data. This theory paper is motivated by our earlier work.
Michael Ryall
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This page is a summary of: Contract Structure for Joint Production: Risk and Ambiguity Under Compensatory Damages, Management Science, July 2016, INFORMS,
DOI: 10.1287/mnsc.2016.2442.
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