Learning in Standard Form Contracts: Theory and Evidence

Abstract

Why are some contractual terms revised continuously while others are stubbornly fixed? We offer an account of both change and stickiness in standard form contracts. We hypothesize that drafters (sellers) are more likely to revise their standard terms when they have an opportunity to learn about the terms’ costs from experience. Consider a warranty. Offering a warranty in an initial period will expose sellers to claims about malfunction by purchasers, allowing sellers to learn whether it is desirable to offer it going forward. When drafters are unable to learn in this manner, either because they fail to experiment or because the term in question is one where there is no increased opportunity to learn from experience, such terms will be revised relatively less frequently. While learning and change occur through various channels, we posit that, all else equal, terms that carry an opportunity to learn from experience will be revised more frequently, whereas terms or term modes that do not will contribute to stickiness and stagnation. Our results support this hypothesis. Using a large sample of changes in business and consumer standard form contracts over a period of seven years, we find that sellers are more likely to revise terms that offer an opportunity to learn from experience than those that do not. These findings are further illustrated and supported by interviews with in-house counsel. The results suggest that standard form contract terms evolve over time as sellers learn experientially about their costs and risks. Our analysis offers new accounts for the use of boilerplate, stickiness, and change, and has normative implications for the optimal design of default rules and product features.

Keywords: Standard Form Contract, Boilerplate, Evolution of Contracts, Learning, Innovation

JEL Classification: K12