THE TRANSACTIONAL DYNAMICS OF
MARKET FRAGILITY
MATTHEW JENNEJOHN *
Copyright © 2022 by Matthew Jennejohn.
This Article is also available online at
http://lcp.law.duke.edu/.
* Professor of Law, BYU Law School. Many thanks to Mark Gergen, Cathy Hwang, Juliet Kostritsky,
Jeff Lipshaw, and Jonathan Lipson for helpful comments on earlier drafts. Special thanks to Glen
Thurston for excellent research assistance.
INTRODUCTION
One way to frame the post-Cold War era of U.S. economic history is as a
revolution in contract design. If the vertically integrated company was the
hallmark of the mid-twentieth century economy, then complex contractual
arrangements are the essence of early twenty-first century economic
organization. Contractual innovation underpins everything from the rise of
private equity to the financial products that precipitated the 2008 financial crisis.
Contract’s revolutionary role has not, however, been isolated to Wall Street.
The less glamorous world of procurement has also undergone a similar
transformation. The time where the modal procurement transaction involved a
routine call, to be later memorialized in a purchase order, by a purchasing
manager at a large conglomerate to the sales office at a supplier to request a
shipment of commodity parts is a largely distant memory.
Supply relationships are less unidimensional now. Before, a significant
amount of production was handled in-house at the vertically integrated
manufacturer, and so procurement was rather straightforward, limited largely to
raw materials or other commodities. That changed as growing global product
market competition caught producers between demands for faster technological
innovation and rapid cost reduction. Many producers responded by “de-
verticalizing.” 1 Mid-century corporate monoliths simultaneously shed
subsidiaries, exiting the internal production of sub-systems, and expanded their
contractual relationships with suppliers. Replacing internal production with
contractual relationships gave producers both greater access to technological
innovation and flexibility. Instead of developing a product internally, one could
buy it from a third-party supplier fully invested in innovating in their area. And,
if the development relationship did not work out, then the supplier could, more
or less, be replaced. As a result, vast and carefully articulated supply chains grew.
The thousands of suppliers, sub-suppliers, and sub-sub-suppliers from all corners
of the world developing systems for Boeing’s commercial airplanes are a
canonical example.
Shifting production to contractual relationships introduces new types of risk,
however. Just as new contractual innovations brought us the financial products
that fueled crisis a little over a decade ago,2 the contractual remaking of modern
supply chains has resulted in profound social costs.
We experienced particularly tragic versions of those costs as COVID-19
closed production facilities around the world in early 2020. As the supply of key
components was disrupted, lifesaving items, such as masks and other protective
materials, were scarce. Disruptions spread across the exchange networks on
which modern life relies, amplifying the consequence of outbreaks in different
localities. In a word, the distributed markets of twenty-first century capitalism
can be extremely “fragile,” in the sense that they are systemically sensitive to
disturbances.
Proposals for improving market resilience fall into a number of categories.
Economic commentary has focused upon re-verticalizing production within firms
and, relatedly, re-shoring production within national boundaries. Others argue
that public lending—ad hoc versions of which were deployed during the
pandemic to shore up struggling companies—should play a larger role. Appetite
on both sides of the U.S. bipartisan divide for industrial policy has been renewed,
a possibility all but unthinkable a decade ago.
1. Matthew C. Jennejohn, Collaboration, Innovation, and Contract Design, 14 S TAN. J. L. B US. &
F IN. 83, 91 (2009); see generally Ronald J. Gilson, Charles Sabel & Robert E. Scott, Contracting for
Innovation: Vertical Disintegration and Interfirm Collaboration, 109 C OLUM. L. REV. 431 (2009);
Jonathan C. Lipson, Promising Justice: Contract (as) Social Responsibility, 2019 WIS. L. REV. 1109 (2019).
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