This course introduces students to the economics of contract design. It takes an engineering approach to contracting, bridging the gap between economic contract theory, contract law scholarship, and the drafting of real world contracts. It consists in discussing the economics underlying business transactions and applying those concepts to focused case studies. Students will apply insights from mechanism design and law to the design of incentive compatible contracts in business transactions. Transactions are agreements between two or more parties that work together to create and allocate value. They can take a range of forms that include: the sale of an asset; the formation and running of a business; initial public offerings (IPOs); debt financings; buyouts; sales out of bankruptcy; leases; construction contracts; oil & gas production contracts, movie financing deals, etc. Deals occur, and value is created, when deal professionals design structures that provide good incentives for all parties involved and constrain opportunities for future misbehavior. The class consists of three modules: Module 1: Contract Theory & Contract Design: The first part of the class consists in theoretical lectures aimed at equipping students with heuristic tools on how to write contracts. To this end, students learn about key concepts of economic and behavioral contract theory. Module 2: Drafting Contracts: The second part of the class initiates students to contract drafting, by analyzing and marking up real world contracts. Module 3: Structuring a Complex Contract for a (hypothetical) client organization: The third part of the class will subdivide the class into groups. Each group will be presented with a complex real world deal or case study. The students will then perform the following tasks:
- Reconstruction of the economic and informational environment in which the contract was written.
- Identification of the main economic, technical and legal challenges of the transaction.
- Drafting of a strategic term sheet aimed at addressing those challenges.
- Recommendations on how the actual contract can be improved.