Modularity of Contracts

Group 6
Aakash (064) | Neil (097) | Surya (382) | Mohak (390) | Ritik (413)
 What is a contract and what are it’s function?

An arrangement between two parties about what each of them shall do to realize value through
Contract
their relationship. Designed to regulate spot exchanges as well as long term interactions

The Functions Mechanism to drive achievement of functions

Co-ordinate
actions

Remuneration
Technical Governance
Procedure
Enforcement Mode

Share quasi-rent Enforcement of

promises
 Options with Disney

• Developing inhouse talent • Acquiring Pixar to

and soft resources to get complete
replace the role of Pixar control over its
resources

Insourcing Acquisition

Strategic Alliance
Alliance (Pixar)

• Alliance with other • Redesigning the

competitors which can agreement with
replace Pixar Pixar with either
same equity or
increasing stake
 Technical Governance

To undertake compatible and efficient actions, agents have to design a mechanism that tells
What?
them what to do during the co-operation process.

Governed by 3 independent clauses

Strategic coordination mode Organizational coordination mode Operational coordination mode

• A process set up to redefine the • It is the ability to re-assign tasks among • The ability / power to modulate,
objective of the coalition participants or to re-define the nature through time and space, the modality of
• It can be very specific and precisely of the utility brought in usage of the different assets.
define the objectives to be achieved – • This change is bought in without • It defines whether the asset use can be
Strategic co-ordination based on altering the first 1 clause intensified in times of contingencies
routine • The contracts which allow re-
OR organization freely or leave it open for
• It can be vague, relying on future one of the parties to define – frequent
negotiations to arrive at the final in construction and automotive industry
outcomes
• Routine takes away flexibility but also
To ensure technical governance in the above, the parties can choose ensures tasks are completed as expected.
• Generally used in industries where the
1) Routines – Exactly define ways of co-operation and no change possible mid way
tasks are specific and non-dynamic.
2) Centralized Authority – Only one party has the right to change the way resources are used • The other two offer flexibility, and are
3) Decentralized Authority – Both the parties have the right to change the way resources are used suitable for dynamic contracts especially
useful in current uncertain environment
 Enforcement Mode
To incite agents to abide by terms of contract Credible Commitments
Can protect each person can protect each agent from his partner’s opportunism
by modifying specificity properties of each agent's assets

Enforcement No credible Unilateral Bilateral

Mechanisms commitment Application Application
• Asset specificity • Deposit of ‘hostage’ • Bilateral ‘hostage’
determines with other model- mutual
opportunistic • Hostage becomes reliance relation
behaviour partner’s property if • Both partners agree
Supervision Guarantor promises not
respected
to modify specificity
of inputs
Mechanism Mechanism
Supervision Mechanism
Can protect each Self Enforcement: each party exercises control over other.
person can protect Recourse on violation- termination
Manipulation of Exit Costs each agent from
Evaluate behaviour of his partner’s
contractors Avoid Opportunistic External non-specialized arbitrator: Court & Law (external
opportunism
Behavior mechanism)- only mode of resolution
Compel cheaters to follow by modifying
required behavior Cheating Pay-off < Cost of specificity
breaking contract properties of each External specialized arbitrator- Controls the transactors
agent's assets (right of investigation and means of coercion). Either the
contracting party or a third party
 Remuneration and Risk Sharing Mode

A quasi-rent shared among the participants of the contract which acts as a consideration to adopt
What? efficient behavior and enforce the contract.

Risk Sharing: As the future is uncertain, the sharing of benefits and losses among the participants
need to be decided ex-ante
Need?
Effort Incentive: Some inputs lacks measurability, thus remunerating them based on contribution
and marginal productivity becomes difficult

Remuneration Mechanisms

Risk borne by two agents Risk borne by one agent

Customized Basis
• Remunerated at its marginal
productivity
OR
• Based on actual contribution
to collective result
Collective Basis
• Fixed sharing rule defined ex-
ante
• Output is divided without
any influence of actual
contribution
Flat Rate Basis
• Fixed compensation
• One agent is remunerated
based on pre-defined rules
without taking intensity of
actual use into account
Intensity of Use Basis
• Usage based compensation
• Assets are remunerated after
taking intensity or effort into
consideration
 The Diversity of Contracts

To enable scholars to categorize the contract grammar into select-few mutually exclusive solutions to
What?
better understand and build this grammar by specifying which solution is implemented for each clause

B
• Not just a naming convention
1 • Describe contractual agreements through their essential features instead
C • Attempt to create an all encompassing standardization for the entire
2 research and academic community and avoid misunderstandings
D • Helps to take into account the original contracts that do not belong
3 to the standard and well-known categories
• Allows for freedom of thought towards contractual innovations
E
• Makes it possible to compare the various contractual arrangements
4 that are the used by actual economic agents
F

G
 Thank You
Questions?

Group 6
Aakash (064) | Neil (097) | Surya (382) | Mohak (390) | Ritik (413)