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The influence of inertia on contract design: contingency planning in information technology service contracts

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Author Info

  • Kyle J. Mayer

    (University of Southern California, Los Angeles, CA, USA)

  • Janet Bercovitz

    (University of Illinois at Urbana-Champaign, Champaign, IL, USA)

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    Abstract

    This paper examines whether the prior relationship between two firms produces an inertial drag that influences contracts used for subsequent exchanges. Using data from the information technology services industry, we examine whether inertia develops during the relationship between firms in how they plan for contingencies. While attributes of the current exchange do play a role, we find that the prior relationship between the firms has a constricting effect on future contracts. Prior relationships can create what we call interorganizational inertia, which leads firms to use the same level of contingency planning in current exchanges that they used in prior contracts. Copyright © 2008 John Wiley & Sons, Ltd.

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    File URL: http://hdl.handle.net/10.1002/mde.1390
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    Bibliographic Info

    Article provided by John Wiley & Sons, Ltd. in its journal Managerial and Decision Economics.

    Volume (Year): 29 (2008)
    Issue (Month): 2-3 ()
    Pages: 149-163

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    Handle: RePEc:wly:mgtdec:v:29:y:2008:i:2-3:p:149-163

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    Web page: http://www3.interscience.wiley.com/cgi-bin/jhome/7976

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    1. Baker, George & Gibbons, Robert & Murphy, Kevin J, 1994. "Subjective Performance Measures in Optimal Incentive Contracts," The Quarterly Journal of Economics, MIT Press, vol. 109(4), pages 1125-56, November.
    2. Shelanski, Howard A & Klein, Peter G, 1995. "Empirical Research in Transaction Cost Economics: A Review and Assessment," Journal of Law, Economics and Organization, Oxford University Press, vol. 11(2), pages 335-61, October.
    3. Arturs Kalnins, 2004. "Relationships and Hybrid Contracts: An Analysis of Contract Choice in Information Technology," Journal of Law, Economics and Organization, Oxford University Press, vol. 20(1), pages 207-229, April.
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