IDEAS home Printed from https://ideas.repec.org/a/sae/sagope/v12y2022i4p21582440221141850.html
   My bibliography  Save this article

When Penalty Fails: Modeling Contractual Misincentives With Evidence From Portugal ITO Agreements

Author

Listed:
  • Thyago Celso Cavalcante Nepomuceno
  • Késsia Thais Cavalcanti Nepomuceno
  • Thiago Poleto
  • Victor Diogho Heuer de Carvalho
  • Ana Paula Cabral Seixas Costa

Abstract

A misincentive is characterized as an incentive producing the opposite effect of motivating or preventing some specific action. In some circumstances, contract penalties such as sanctions and fines on late delivery or low-quality software encourage the irregularities instead of preventing them from occurring. The present study models misincentive behaviors in Information Technology Outsourcing (ITO) transactions as a Principal-Agent problem. Considering the non-linear relationship in software vendors’ cost structure and the client’s sensitivity to the product/service quality and delivery time, we offer theoretical modeling elucidating the best responses on agreements under incomplete and asymmetric information. Some empirical evidence of contractual misincentives is reported in outsourcing arrangements between private institutions and public administrations in Portugal. The contracts were divided into three categories: pure contracts with no incentive clauses, contracts with no explicit monetary penalties, and contracts under explicit sanctions. The results suggest that the knowledge of the penalty reduces the Agent’s uncertainty about the Principal’s cost structure and might lead them to intentionally delay the delivery of the technology.

Suggested Citation

  • Thyago Celso Cavalcante Nepomuceno & Késsia Thais Cavalcanti Nepomuceno & Thiago Poleto & Victor Diogho Heuer de Carvalho & Ana Paula Cabral Seixas Costa, 2022. "When Penalty Fails: Modeling Contractual Misincentives With Evidence From Portugal ITO Agreements," SAGE Open, , vol. 12(4), pages 21582440221, December.
    • Handle: RePEc:sae:sagope:v:12:y:2022:i:4:p:21582440221141850
    DOI: 10.1177/21582440221141850
    as

    Download full text from publisher

    File URL: https://journals.sagepub.com/doi/10.1177/21582440221141850
    Download Restriction: no
    File URL: https://libkey.io/10.1177/21582440221141850?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Yaoguang Zhong & Fangfang Guo & Zhiqiang Wang & Huajun Tang, 2019. "Coordination Analysis of Revenue Sharing in E-Commerce Logistics Service Supply Chain With Cooperative Distribution," SAGE Open, , vol. 9(3), pages 21582440198, August.
    2. Chenchen Yang & Junfeng Dong & Jingjing Hao, 2019. "Cooperation Contracts Between Small and Major Scenic Spots in Peak Seasons," SAGE Open, , vol. 9(3), pages 21582440198, July.
    3. Thyago Celso Cavalcante Nepomuceno & Cinzia Daraio & Ana Paula Cabral Seixas Costa, 2020. "Combining multi-criteria and directional distances to decompose non-compensatory measures of sustainable banking efficiency," Applied Economics Letters, Taylor & Francis Journals, vol. 27(4), pages 329-334, February.
    4. Prawesh, Shankar & Chari, Kaushal & Agrawal, Manish, 2021. "Industry Norms as Predictors of IT Outsourcing Behaviors," International Journal of Information Management, Elsevier, vol. 56(C).
    5. Fan Yu, 2020. "Monitoring and CEO Contractual Incentive Pay," International Review of Finance, International Review of Finance Ltd., vol. 20(3), pages 701-736, September.
    6. Jianxiong Zhang & Lin Feng & Wansheng Tang, 2014. "Optimal Contract Design of Supplier-Led Outsourcing Based on Pontryagin Maximum Principle," Journal of Optimization Theory and Applications, Springer, vol. 161(2), pages 592-607, May.
    7. Bustinza, O.F. & Arias-Aranda, D. & Gutierrez-Gutierrez, L., 2010. "Outsourcing, competitive capabilities and performance: an empirical study in service firms," International Journal of Production Economics, Elsevier, vol. 126(2), pages 276-288, August.
    8. Adiel Teixeira De Almeida, 2013. "Additive-Veto Models For Choice And Ranking Multicriteria Decision Problems," Asia-Pacific Journal of Operational Research (APJOR), World Scientific Publishing Co. Pte. Ltd., vol. 30(06), pages 1-20.
    9. Mohit Goswami & Saurabh Pratap & S.K. Kumar, 2016. "An integrated Bayesian-Game theoretic approach for product portfolio planning of a multi-attributed product in a duopolistic market," International Journal of Production Research, Taylor & Francis Journals, vol. 54(23), pages 6997-7013, December.
    10. Desmond (Ho‐Fu) Lo & Giorgio Zanarone & Mrinal Ghosh, 2022. "Contracting to (dis)incentivize? An integrative transaction‐cost approach on how contracts govern specific investments," Strategic Management Journal, Wiley Blackwell, vol. 43(8), pages 1528-1555, August.
    11. Jensen, Michael C. & Meckling, William H., 1976. "Theory of the firm: Managerial behavior, agency costs and ownership structure," Journal of Financial Economics, Elsevier, vol. 3(4), pages 305-360, October.
    12. Maisa Mendonça Silva & Thiago Poleto & Lúcio Camara e Silva & Ana Paula Henriques de Gusmao & Ana Paula Cabral Seixas Costa, 2016. "A Grey Theory Based Approach to Big Data Risk Management Using FMEA," Mathematical Problems in Engineering, Hindawi, vol. 2016, pages 1-15, August.
    13. Scarf, P.A. & Cavalcante, C.A.V. & Lopes, R.S., 2019. "Delay-time modelling of a critical system subject to random inspections," European Journal of Operational Research, Elsevier, vol. 278(3), pages 772-782.
    14. Craig D. Lair, 2019. "Outsourcing and the Risks of Dependent Autonomy," SAGE Open, , vol. 9(2), pages 21582440198, May.
    15. Haresh Gurnani & Mehmet Gümüş & Saibal Ray & Tridip Ray, 2012. "Optimal Procurement Strategy Under Supply Risk," Asia-Pacific Journal of Operational Research (APJOR), World Scientific Publishing Co. Pte. Ltd., vol. 29(01), pages 1-31.
    16. Debabrata Dey & Ming Fan & Conglei Zhang, 2010. "Design and Analysis of Contracts for Software Outsourcing," Information Systems Research, INFORMS, vol. 21(1), pages 93-114, March.
    17. Seungjin Whang, 1992. "Contracting for Software Development," Management Science, INFORMS, vol. 38(3), pages 307-324, March.
    18. Mengdi Zhang & Yufang Fu & Zhiheng Zhao & Saurabh Pratap & George Q. Huang, 2019. "Game theoretic analysis of horizontal carrier coordination with revenue sharing in E-commerce logistics," International Journal of Production Research, Taylor & Francis Journals, vol. 57(5), pages 1524-1551, March.
    19. Michael Kosfeld & Armin Falk, 2006. "The Hidden Costs of Control," American Economic Review, American Economic Association, vol. 96(5), pages 1611-1630, December.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Gilles Hilary & Sterling Huang, 2023. "Trust and Contracting: Evidence from Church Sex Scandals," Journal of Business Ethics, Springer, vol. 182(2), pages 421-442, January.
    2. Arnold, Ulli & Neubauer, Joerg & Schoenherr, Tobias, 2012. "Explicating factors for companies’ inclination towards corruption in Operations and supply chain management: An exploratory study in Germany," International Journal of Production Economics, Elsevier, vol. 138(1), pages 136-147.
    3. Daniel G. Arce, 2007. "Is Agency Theory Self‐Activating?," Economic Inquiry, Western Economic Association International, vol. 45(4), pages 708-720, October.
    4. Giuseppe Danese & Luigi Mittone, 2015. "Trust and trustworthiness in experimental organizations," CEEL Working Papers 1501, Cognitive and Experimental Economics Laboratory, Department of Economics, University of Trento, Italia.
    5. Sagnika Sen & T. S. Raghu, 2013. "Interdependencies in IT Infrastructure Services: Analyzing Service Processes for Optimal Incentive Design," Information Systems Research, INFORMS, vol. 24(3), pages 822-841, September.
    6. Margaret A. Abernethy & Chung-Yu Hung & Laurence van Lent, 2020. "Expertise and Discretionary Bonus Decisions," Management Science, INFORMS, vol. 66(1), pages 415-432, January.
    7. Asunur Cezar & Huseyin Cavusoglu & Srinivasan Raghunathan, 2014. "Outsourcing Information Security: Contracting Issues and Security Implications," Management Science, INFORMS, vol. 60(3), pages 638-657, March.
    8. Pieper, Torsten M., 2010. "Non solus: Toward a psychology of family business," Journal of Family Business Strategy, Elsevier, vol. 1(1), pages 26-39, March.
    9. Chenglong Zhang & Nan Feng & Jianjian Chen & Dahui Li & Minqiang Li, 0. "Outsourcing Strategies for Information Security: Correlated Losses and Security Externalities," Information Systems Frontiers, Springer, vol. 0, pages 1-18.
    10. Maria L. Goranova & Richard L. Priem & Hermann A. Ndofor & Cheryl A. Trahms, 2017. "Is there a “Dark Side” to Monitoring? Board and Shareholder Monitoring Effects on M&A Performance Extremeness," Strategic Management Journal, Wiley Blackwell, vol. 38(11), pages 2285-2297, November.
    11. Chenglong Zhang & Nan Feng & Jianjian Chen & Dahui Li & Minqiang Li, 2021. "Outsourcing Strategies for Information Security: Correlated Losses and Security Externalities," Information Systems Frontiers, Springer, vol. 23(3), pages 773-790, June.
    12. Liyuan Zhu & Nan Liu, 2023. "Game theoretic analysis of logistics service coordination in a live-streaming e-commerce system," Electronic Commerce Research, Springer, vol. 23(2), pages 1049-1087, June.
    13. Bo Dai & Fenfen Li & Yunchong Liu, 2022. "A Profit Allocation Mechanism for Customer-to-Manufacturer Platform in e-Commercial Business," SAGE Open, , vol. 12(2), pages 21582440221, May.
    14. Shivam Gupta & Anupam Agrawal & Jennifer K. Ryan, 2023. "Agile contracting: Managing incentives under uncertain needs," Production and Operations Management, Production and Operations Management Society, vol. 32(3), pages 972-988, March.
    15. John Charles Bradbury, 2019. "Monitoring and Employee Shirking: Evidence From MLB Umpires," Journal of Sports Economics, , vol. 20(6), pages 850-872, August.
    16. Yuyan Wang & Zhaoqing Yu & Liang Shen & Runjie Fan & Rongyun Tang, 2021. "Decisions and Coordination in E-Commerce Supply Chain under Logistics Outsourcing and Altruistic Preferences," Mathematics, MDPI, vol. 9(3), pages 1-23, January.
    17. Chul Ho Lee & Xianjun Geng & Srinivasan Raghunathan, 2013. "Contracting Information Security in the Presence of Double Moral Hazard," Information Systems Research, INFORMS, vol. 24(2), pages 295-311, June.
    18. Anandasivam Gopal & Konduru Sivaramakrishnan & M. S. Krishnan & Tridas Mukhopadhyay, 2003. "Contracts in Offshore Software Development: An Empirical Analysis," Management Science, INFORMS, vol. 49(12), pages 1671-1683, December.
    19. Mashalah, Heider Al & Hassini, Elkafi & Gunasekaran, Angappa & Bhatt (Mishra), Deepa, 2022. "The impact of digital transformation on supply chains through e-commerce: Literature review and a conceptual framework," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 165(C).
    20. Billinger, Stephan & Rosenbaum, Stephen Mark, 2019. "Discretionary mechanisms and cooperation in hierarchies: An experimental study," Journal of Economic Psychology, Elsevier, vol. 74(C).

    Corrections

    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:sae:sagope:v:12:y:2022:i:4:p:21582440221141850. See general information about how to correct material in RePEc.

    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.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with 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.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: SAGE Publications (email available below). General contact details of provider: .

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

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.