IDEAS home Printed from
   My bibliography  Save this article

Contracting for Software Development


  • Seungjin Whang

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


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

    Download full text from publisher

    File URL:
    Download Restriction: no


    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.

    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.


    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:inm:ormnsc:v:38:y:1992:i:3:p:307-324. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Mirko Janc). General contact details of provider: .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.