Contract as Automaton: The Computational Representation of Financial Agreements

Mark Flood and Oliver R. Goodenough ()
Additional contact information
Oliver R. Goodenough: Office of Financial Research

No 15-04, Working Papers from Office of Financial Research, US Department of the Treasury

Abstract: We show that the fundamental legal structure of a well-written financial contract follows a state-transition logic that can be formalized mathematically as a finite-state machine (also known as a finite-state automaton). The automaton defines the states that a financial relationship can be in, such as "default," "delinquency," "performing," etc., and it defines an "alphabet" of events that can trigger state transitions, such as "payment arrives," "due date passes," etc. The core of a contract describes the rules by which different sequences of event arrivals trigger particular sequences of state transitions in the relationship between the counterparties. By conceptualizing and representing the legal structure of a contract in this way, we expose it to a range of powerful tools and results from the theory of computation. These allow, for example, automated reasoning to determine whether a contract is internally coherent and whether it is complete relative to a particular event alphabet. We illustrate the process by representing a simple loan agreement as an automaton.

Keywords: Financial Contracts; Contract Automation (search for similar items in EconPapers)
Pages: 50 pages
Date: 2015-03-26, Revised 2017-03-27
New Economics Papers: this item is included in nep-cmp
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
https://www.financialresearch.gov/working-papers/f ... ncial-Agreements.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:ofr:wpaper:15-04

Access Statistics for this paper

More papers in Working Papers from Office of Financial Research, US Department of the Treasury Contact information at EDIRC.
Bibliographic data for series maintained by Corey Garriott ().