What Drives Variation in Contracts: Economics or Lawyers?

We study whether contracts are primarily instruments to mitigate economic problems between
contracting parties or also reflect the styles of legal advisors. We analyze this question by exploiting
access to 151 proprietary acquisition contracts. Focusing on warranties and covenants—two sets of
key provisions—we find that the deal environment explains most of their variation across contracts.
The styles of law firms impact contractual outcomes as well, though their additional explanatory
power is relatively modest. The effects are stronger when we look at the styles of individual lawyers.
The implications of the actual drivers of contract design are important if contracts affect transaction
prices and to understand why real‐world contracts may deviate from what is predicted by contract
theory.