Hollywood Deals: Soft Contracts for Hard Markets
Abstract: Hollywood film studios, talent and other deal participants regularly commit to, and undertake production of, high-stakes film projects on the basis of unsigned “deal memos” or draft agreements whose legal enforceability is uncertain. These “soft contracts” constitute a hybrid instrument adapted to a transactional environment where neither formal contract nor reputation effects adequately protect parties against the holdup risk and project risk inherent to a film project. Parties negotiate (and renegotiate) the degree of contractual formality, which correlates with legal enforceability, as a proxy for allocating these risks at a transaction-cost savings relative to a fully formalized and specified instrument. Uncertainly enforceable contracts embed an implicit termination option that provides some protection against project risk while maintaining a threat of legal liability that provides some protection against holdup risk. Historical evidence suggests that soft contracts substitute in part for the vertically integrated structures that performed the same risk-allocation function in the “studio system” era.
