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Relationships and Hybrid Contracts: An Analysis of Contract Choice in Information Technology

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  • Arturs Kalnins
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    Abstract

    Selecting the type of contract is an important aspect of governing interfirm transactions. The purpose of this article is to examine the use of fixed-fee and time-and-materials (T&M, or cost-plus) contracts and a hybrid contract that consists of a T&M contract with a cap. In addition to uncertainty and measurement factors, we also address a relatively unexplored aspect of contracting--how the prior relationship between the firms influences the type of contract the firms select. Using data on 394 contracts from the information technology (IT) services industry, we show that T&M contracts are preferred when the cost of measuring quality ex post is high and when it is difficult to estimate costs ex ante. We also find site-specific measures of relationship lead to a preference for low-powered T&M contracts. Copyright 2004, Oxford University Press.

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    Bibliographic Info

    Article provided by Oxford University Press in its journal The Journal of Law, Economics, and Organization.

    Volume (Year): 20 (2004)
    Issue (Month): 1 (April)
    Pages: 207-229

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    Handle: RePEc:oup:jleorg:v:20:y:2004:i:1:p:207-229

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    Cited by:
    1. Hueth, Brent & Ligon, Ethan & Melkonyan, Tigran A., 2008. "Interactions between Explicit and Implicit Contracting: Evidence from California Agriculture," 2008 Annual Meeting, July 27-29, 2008, Orlando, Florida 6068, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
    2. Michael D. Ryall & Rachelle C. Sampson, 2009. "Formal Contracts in the Presence of Relational Enforcement Mechanisms: Evidence from Technology Development Projects," Management Science, INFORMS, vol. 55(6), pages 906-925, June.
    3. Lumineau, Fabrice & Henderson, James, 2012. "The influence of relational experience and contractual governance on the negotiation strategy in buyer-supplier disputes," MPRA Paper 38510, University Library of Munich, Germany.
    4. 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.
    5. Hideshi Itoh & Hodaka Morita, 2011. "Formal Contracts, Relational Contracts, and the Threat-Point Effect," CESifo Working Paper Series 3533, CESifo Group Munich.
    6. Radkevitch, U.L. & van Heck, H.W.G.M. & Koppius, O.R., 2008. "Choosing between Auctions and Negotiations in Online B2B Markets for IT Services: The Effect of Prior Relationships and Performance," ERIM Report Series Research in Management ERS-2008-004-LIS, Erasmus Research Institute of Management (ERIM), ERIM is the joint research institute of the Rotterdam School of Management, Erasmus University and the Erasmus School of Economics (ESE) at Erasmus Uni.
    7. Maria Bigoni & Giancarlo Spagnolo & Paola Valbonesi, 2010. "Sticks and Carrots in Procurement," CEIS Research Paper 157, Tor Vergata University, CEIS, revised 28 May 2010.
    8. Giorgio Zanarone, 2012. "Coase (1937) revisited: Endogenous fiat in firms and markets," International Review of Economics, Springer, vol. 59(2), pages 201-221, July.
    9. Kyle J. Mayer & Janet Bercovitz, 2008. "The influence of inertia on contract design: contingency planning in information technology service contracts," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 29(2-3), pages 149-163.

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