i) the project risk arising from uncertainty as to the project’s likelihood of success or failure (the latter being the typical result); and (ii) the holdup risk arising from the irrecoverable and sequential character of investments in a film project.Transacting parties negotiate the degree of contractual formality as an implicit term that proxies for the explicit allocation of those risks in an environment characterized by high specification costs, which reduces the efficacy of formal contract, and unreliable reputation effects, which demands some recourse to formal contract. Increasing contractual formality reduces holdup risk by supplying legal sanctions to deter opportunistic termination and renegotiation. Reducing contractual formality reduces project risk by supplying an implicit termination and renegotiation option in response to adverse information concerning the expected commercial outcome. The result is what I call the “soft contract”
my survey of the Daily Variety archives identifies, multiple cases of apparently opportunistic actions: studios substitute actors during development contrary to prior commitments, producers delay moving forward with a project but keep actors indefinitely “on call”, actors withdraw from projects shortly prior to the commencement of shooting, and studios occasionally terminate actors or directors even after shooting has commenced.
While studios and talent agencies have a long life, independent production companies, individual producers, and actors may often have short careers
Parties may radically underinvest in specification efforts in order to endanger contract formation and thereby generate an implicit termination option that is exercisable at a certain cost and within a certain range of circumstances.
Major studio counsel reported that studios prefer to enter into fully executed agreements with talent as a general matter (antes de empezar a rodar, pero no en la fase de pre-producción) but higher-value portions of the talent pool prefer unsigned deals and sometimes successfully resist this demand and defer finalization of a long-form contract until some point during production… or defer finalization indefinitely… a studio only “feels comfortable” entering into unsigned deals with the highest-value talent… The very reason why the studio strongly prefers an executed agreement prior to the start of shooting induces high-value talent to resist executing any such agreement. Doing so would forfeit holdup opportunities once production commences while delivering little value in the form of protection against opportunism by the studio, which has few holdup opportunities and no credible termination threat given the limited pool of substitute talent.
“… meaning, he always had sufficient market value and reputational capital in order to preserve his in-production renegotiation option and had little reason to fear being held up by the studio. Lower value talent lacks a star’s reputational capital: as a result, she cannot credibly commit against holding up the studio and, for precisely the same reason, she fears being held-up by the studio; hence, in that case, both talent and the studio agree to incur the specification costs required to achieve a high level of formalization prior to the start of shooting.