851-0742-00L  Contract Design

SemesterAutumn Semester 2018
LecturersA. Stremitzer
Periodicityyearly recurring course
Language of instructionEnglish
CommentParticularly suitabe for students of D-ARCH, D-BAUG, D-CHAB, DMATH, D-MTEC, D-INFK, D-MAVT


AbstractThis course takes an engineering approach to contracting. It aims to bridge the gap between economic contract theory, contract law scholarship and the drafting of real world contracts. Students will apply insights from mechanism design and law to the design of incentive compatible contracts.
ObjectiveThis course takes and engineering approach to structuring transactions. It consists in discussing the economics underlying business transactions and applying those concepts to focused case studies that illustrate the economic concepts that we study.

Transactions are agreements between two or more parties to 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; movie financing deals, etc.

Deals occur, and value is created, when deal professionals design structures that make value more ascertainable, constrain future misbehavior by participants and limit the potential costs of long-term commitment by preventing the parties from taking advantage of counterparty’s sunk investments. If problems like these are not adequately addressed, the deal may not happen. But if the terms of the deal can be designed to respond to such problems, the transaction is more likely to be viable and the potential gains from it achievable.

The Class consists of 3 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 will be made familiar with the 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:

1) Student teams will first reconstruct the environment in which the contract was written.
2) By understanding the goals of both parties, they will in the next step identify the main economic, technical and legal issues of the deal.
3) They will come up with a strategic term sheet aimed at addressing those issues.
4) They will analyze the incentive structure of the actual contract and critically assess whether the contract implements the key ideas of the term sheet. If not, they will make recommendations on how the contract should be improved.