A Bargaining Dynamic Transaction Cost Approach to Understanding Framework Contracts

This Article takes a different approach. It draws on the literature of these scholars but suggests that another way to understand the arrangements parties enter into in a variety of settings to purchase or sell goods or to innovate on a product or drug can best be understood in terms of a bargaining dynamic that looks at how the private interests of the parties are turned into joint interests in the agreement reached. It is a mistake to talk about the form of a contract without first understanding the bargaining needs and positions of the parties and how those needs get reflected in the form of the agreement, given the options the party has. The form of the contract is not an end in itself. As a result in order to analyze the form that contracting takes we must understand the function that each party needs the contract to perform—the kinds of transaction costs that each party must minimize if they want to go forward with their projects. These costs include opportunism, asymmetric information, uncertainty, and other frictions such as entropy and spillover recently identified by Professor Jennejohn. Each party approaches the bargaining with its own private goals and will reach a bargain only if the benefits of achieving those goals through a particular contract type or form outweigh the costs which means firms are constantly looking for a contract form that will minimize its costs while maximizing contractual benefits