Contractual Complexity and the Cognitive Load of R&D Alliance Contracts

Abstract

We offer a new perspective on measuring the complexity of interfirm contracts. We define complex contracts as those contracts that contain many elements (clauses) with a relatively large number of interdependencies that also impose a significant cognitive load on contract parties. Previous studies on contractual complexity employ objective measures such as the number of pages, the number of kilobytes, or the number of provisions to measure this complexity. Following some suggestions in the literature, we argue that the degree to which a contract imposes a cognitive load on contract parties should be taken as another important dimension of contractual complexity. We develop a conceptual model of the complexity of contracts using a multidimensional perspective where both objective and subjective dimensions are taken into account. Our empirical analysis combines a sample of nearly 400 R&D alliance contracts in the biopharmaceutical industry with a measurement of the cognitive load of these contracts. Our findings show that quantitative, objective measures of complexity, such as length, and objective as well as subjective elements of the cognitive load of contracts, that is, the information‐processing effort that contractual parties have to make, do indeed measure different aspects of contractual complexity.