Fix the Price or Price the Fix? Resolving the Sequencing Puzzle in Corporate Contracting

By Joshua Higbee, Matthew Jennejohn, Cree Jones & Eric Talley (CLS BlueSky Blog)

In their latest paper, Joshua Higbee, Matthew Jennejohn, Cree Jones, and Eric Talley (CLS BlueSky Blog) tackle a long-standing puzzle in contract theory: Why do practitioners in high-stakes corporate transactions—such as M&A and financings—often lock in price terms early, while leaving non-price terms for later negotiation? This approach runs counter to conventional economic theory, which suggests that non-price terms—key drivers of joint value creation—should be established first, with price serving as a final adjustment tool to balance any disparities. Yet, in practice, price is frequently set early, challenging the theoretical wisdom behind optimal contract sequencing.

Bridging the Gap Between Theory and Practice

The authors present a new analytical framework that helps resolve this paradox by combining a bargaining model with a search game for innovative contractual provisions. Their research suggests that fixing price early can actually be advantageous under specific conditions, offering a compelling explanation for why this practice persists in high-stakes dealmaking. The paper not only provides a fresh perspective on this contract sequencing puzzle but also generates testable empirical predictions about when and why price-first bargaining might be preferable.

The Theory vs. Practice Dilemma

Classical contract theory, shaped by the work of Nobel Prize-winning economists, argues that price should be the last term finalized in negotiations. Since price is a flexible mechanism that helps fine-tune a deal after optimizing other key terms—such as covenants, conditions, and warranties—waiting to set price should, in theory, lead to more mutually beneficial agreements.

However, in real-world corporate transactions, executives often lock in price terms early through term sheets or letters of intent, deferring non-price terms for later refinement by legal and financial experts. Moreover, revisiting price is typically discouraged due to institutional norms and reputational concerns. This widespread practice raises a fundamental question: Why do experienced dealmakers consistently deviate from the theoretically optimal approach?

A New Explanation: Price Fixation as an Incentive for Innovation

The authors argue that fixing price early can actually enhance incentives for parties to invest in the costly and uncertain process of discovering innovative non-price terms. Their findings suggest that, under certain conditions, this approach may promote efficiency and better deal outcomes, offering a new perspective on why sophisticated negotiators favor price-first bargaining in billion-dollar transactions…

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