Understanding the ABC Model of Change in Sticky Contracts
This paper by Gulati and Scott explores the "ABC" model of contract change, focusing on the interplay between costs, expected values, and risks. It emphasizes how specific factors—such as the cost of change (A), the expected value of adverse consequences of no change (B), and the risk of adverse consequences even with change (C)—influence contract decisions. The authors suggest that in the context of recent legal decisions and market dynamics, the understanding of these variables is crucial for managing "sticky" contracts effectively.
Understanding the ABC Model of Change in Sticky Contracts
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Presentation Transcript
Gulati & Scott, 3 1/2 Minutes: Sticky Contracts Karl Okamoto Earle Mack School of Law Drexel University
The “ABC” Model* A clause will change if A < B – C *Pat. Pending
Where: A is the cost of change, B is the expected value of the adverse consequence of “no change,” and C is the risk that the adverse consequence will occur even if there is a change.
The sense that the Elliott decision was aberrational and unlikely to be followed suggests B continues to be low • The sense that change is costly suggests A is high • The recent examples of trustee structures and limited rights to sue suggest that C is significant • The “short-term” horizon of government issuers suggest B is small • The fact that default is the triggering event and likely to be a supervening contingency suggests that C is high • Observation from other areas of practice that sovereign wealth is idiosyncratic also suggest B is smaller than A. • BUT finding in the companion paper that markets were affected by Elliott suggests that B is real (but relative value?)
