My colleague, Matt Jennejohn, has just posted to SSRN an excellent paper on innovation and contract design. The Private Order of Innovation Networks (forthcoming in the Stanford Law Review) takes aim at the theory of braided contracts described by Ron Gilson, Chuck Sabel, and Bob Scott. According to Gilson et al., formal contracts "braid" with informal norms to mitigate the potential for opportunism. Jennejohn suggests that the weakness of this approach is that it "conceives of the exchange problem only in terms of opportunism." As a result, braiding theory cannot explain many prominent features of strategic alliances, especially the diversity one perceives in alliance agreements. Jennejohn argues instead that "exchange hazards in innovation networks are multidimensional," and he proposes a new conceptual tool for contract analysis, which he calls "multivalent contracting."

Multivalent contracting is the notion that alliance contracts respond to a number of exchange hazards at once. In Jennejohn's words, "The argument is that expanding the menu of exchange hazards from a singular focus on holdup problems to also include 'spillover' and 'entropy' issues explains alliance diversity by illuminating the interdependencies between collaborators’ governance strategies." Jennejohn illustrates the promise of this approach with a preliminary empirical analysis of management committees in alliance contracts.

The paper also includes some ideas that will be of special interest to scholars interested in contract interpretation. Braided contracting is "largely a self-enforcement theory of contract [in which] the focus of much of the analysis is on how parties can solve their own problems without recourse to the courts." By contrast, the theory of multivalent contracting seems to better explain what courts actually do in many cases, namely, using multiple adjacent doctrines to resolve disputes. Thus, according to Jennejohn, "the choice before the enforcement court is not simply whether it will hew to a more formalist or contextualist mode of contract interpretation, but also how it will efficiently intermix a number of available doctrines."

Highly recommended!

Contracts, Economics, Empirical Legal Studies, Innovation | Bookmark