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Contracting for Software Development

Author

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  • Seungjin Whang

    (Graduate School of Business, Stanford University, Stanford, California 94305)

Abstract

Software contracting is a multi-faceted issue that involves legal, economic, managerial and technological considerations. To better understand the economic aspect of software contracting, this paper provides a summary review of software development contracts, followed by a gametheoretic model developed to incorporate incentive and information issues associated with software contracting. In the model an outside contractor is hired to develop a software system over multiple periods. Due to the uncertainties about costs or technology, the developer faces the risk of having to abandon the project at an intermediate phase. The user is better informed of the benefit of the system, while the developer privately discovers the development costs as the project advances. Given the limited information, the contracting parties make decisions in their own interest, leaving each party vulnerable to the other's opportunistic behavior. In this setting, we construct a viable contract that aligns the incentives of the contracting parties and produces the same equilibrium outcome as in in-house development. We also relate the implications of the model to the actual contract cases.

Suggested Citation

  • Seungjin Whang, 1992. "Contracting for Software Development," Management Science, INFORMS, vol. 38(3), pages 307-324, March.
  • Handle: RePEc:inm:ormnsc:v:38:y:1992:i:3:p:307-324
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    File URL: http://dx.doi.org/10.1287/mnsc.38.3.307
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    Cited by:

    1. repec:spr:annopr:v:240:y:2016:i:2:d:10.1007_s10479-013-1505-2 is not listed on IDEAS
    2. Qiu, Larry D., 2006. "A general equilibrium analysis of software development: Implications of copyright protection and contract enforcement," European Economic Review, Elsevier, vol. 50(7), pages 1661-1682, October.
    3. David Martimort & Aggey Semenov & Lars Stole, 2017. "A Theory of Contracts with Limited Enforcement," Review of Economic Studies, Oxford University Press, vol. 84(2), pages 816-852.
    4. Elitzur, Ramy & Gavious, Arieh & Wensley, Anthony K.P., 2012. "Information systems outsourcing projects as a double moral hazard problem," Omega, Elsevier, vol. 40(3), pages 379-389.
    5. Feng, Shan & Da Xu, Li, 2000. "Mathematical modeling of China's State-owned Enterprises' Contract System," European Journal of Operational Research, Elsevier, vol. 124(2), pages 235-242, July.
    6. repec:spr:infosf:v:10:y:2008:i:2:d:10.1007_s10796-007-9061-4 is not listed on IDEAS
    7. Weng, Z. Kevin & McClurg, Tim, 2003. "Coordinated ordering decisions for short life cycle products with uncertainty in delivery time and demand," European Journal of Operational Research, Elsevier, vol. 151(1), pages 12-24, November.
    8. Jim Rooney & Suresh Cuganesan, 2009. "Contractual and Accounting Controls in Outsourcing Agreements: Evidence from the Australian Home Loan Industry," Australian Accounting Review, CPA Australia, vol. 19(2), pages 80-92, June.
    9. Ni, Debing & Li, Kevin W. & Tang, Xiaowo, 2009. "Production costs, scope economies, and multi-client outsourcing under quantity competition," International Journal of Production Economics, Elsevier, vol. 121(1), pages 130-140, September.

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