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Management Control for Market Transactions: The Relation Between Transaction Characteristics, Incomplete Contract Design, and Subsequent Performance

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Author Info

  • Shannon W. Anderson

    ()
    (Jesse H. Jones Graduate School of Management, Rice University, Room 239--MS531, 6100 Main Street, Houston, Texas 77005-1892, and Department of Accounting and Business Information Systems, University of Melbourne, Melbourne, Australia)

  • Henri C. Dekker

    ()
    (Department of Accounting, Vrije Universiteit Amsterdam, De Boelelaan 1105, 1081 HV Amsterdam, The Netherlands)

Abstract

Using an unusually comprehensive database on 858 transactions for information technology products and accompanying services, we study how close partners who are exposed to opportunistic hazards structure and control a significant transaction. We analyze data on the terms of contracting to determine whether transaction and supplier characteristics that generate opportunistic hazards are related to the formal management control structure. We also examine whether misalignment between transaction and supplier characteristics and the control structure is associated with ex post performance problems. Characteristics associated with hazards are found to be positively related to contract extensiveness. Factor analysis of the use of 24 contract terms reveals four groups of contract terms that are commonly used in combination. We interpret these factors as "dimensions of management control" and label them: assignment of rights, product and price, after-sales service, and legal recourse. Characteristics associated with hazards are positively related to the use of all four dimensions of management control, with different hazards associated with different controls. We then examine the relation between transaction characteristics and ex post transaction problems, demonstrating that even in the presence of mutually agreeable contracts, hazards remain. We conclude that costs of contracting are associated with increased use of contract terms on assignment of rights, after-sales service, and legal recourse. Finally, we present evidence that management control structures that are better aligned with transaction hazards mitigate subsequent performance problems, though at a nontrivial cost of contracting.

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File URL: http://dx.doi.org/10.1287/mnsc.1050.0456
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Bibliographic Info

Article provided by INFORMS in its journal Management Science.

Volume (Year): 51 (2005)
Issue (Month): 12 (December)
Pages: 1734-1752

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Handle: RePEc:inm:ormnsc:v:51:y:2005:i:12:p:1734-1752

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Related research

Keywords: management control; contingency theory; transaction costs; costs of contracting; information technology;

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Citations

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Cited by:
  1. Van den Abbeele, Alexandra & Roodhooft, Filip & Warlop, Luk, 2009. "The effect of cost information on buyer-supplier negotiations in different power settings," Accounting, Organizations and Society, Elsevier, vol. 34(2), pages 245-266, February.
  2. Watson, Glyn & Lonsdale, Chris & Peng, Fei & Sanderson, Joe, 2012. "Lessons for Procurement and Contract Management Practice in the Public Sector: Evidence from a Quantitative Study," MPRA Paper 47686, University Library of Munich, Germany.
  3. Bin Jiang, 2009. "Implementing Supplier Codes of Conduct in Global Supply Chains: Process Explanations from Theoretic and Empirical Perspectives," Journal of Business Ethics, Springer, vol. 85(1), pages 77-92, March.
  4. Lumineau, Fabrice & Quelin, Bertrand, 2012. "An Empirical Investigation of Interorganizational Opportunism and Contracting Mechanisms," MPRA Paper 38362, University Library of Munich, Germany.
  5. Marc Bollecker & Wilfrid Azan, 2008. "Les frontières de la recherche en contrôle de gestion : une analyse des cadres théoriques mobilisés," Post-Print halshs-00522395, HAL.
  6. Yeung, Kwong & Lee, Peter K.C. & Yeung, Andy C.L. & Cheng, T.C.E., 2013. "Supplier partnership and cost performance: The moderating roles of specific investments and environmental uncertainty," International Journal of Production Economics, Elsevier, vol. 144(2), pages 546-559.
  7. Marco Furlotti, 2007. "There is more to contracts than incompleteness: a review and assessment of empirical research on inter-firm contract design," Journal of Management and Governance, Springer, vol. 11(1), pages 61-99, March.
  8. Schneider, Christian O. & Bremen, Philipp & Schönsleben, Paul & Alard, Robert, 2013. "Transaction cost economics in global sourcing: Assessing regional differences and implications for performance," International Journal of Production Economics, Elsevier, vol. 141(1), pages 243-254.
  9. Damien Bo, 2009. "Inter-Organizational Controls in Public Land Concession Contracts," Working Papers hal-00462488, HAL.
  10. Vosselman, Ed & Meer-Kooistra, Jeltje van der, 2009. "Accounting for control and trust building in interfirm transactional relationships," Accounting, Organizations and Society, Elsevier, vol. 34(2), pages 267-283, February.
  11. Richardson, Alan J. & Kilfoyle, Eksa, 2009. "Accounting in markets, hierarchies and networks: The role of accounting in the transnational governance of postal transactions," Accounting, Organizations and Society, Elsevier, vol. 34(8), pages 939-956, November.
  12. Dekker, Henri C., 2008. "Partner selection and governance design in interfirm relationships," Accounting, Organizations and Society, Elsevier, vol. 33(7-8), pages 915-941.
  13. Widener, Sally K., 2007. "An empirical analysis of the levers of control framework," Accounting, Organizations and Society, Elsevier, vol. 32(7-8), pages 757-788.
  14. Martin, Xavier, 2013. "Solving theoretical and empirical conundrums in international strategy research by matching foreign entry mode choices and performance," Open Access publications from Tilburg University urn:nbn:nl:ui:12-5637252, Tilburg University.

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