Reputation Effects and the Limits of Contracting: A Study of the Indian Software Industry

32 Pages Posted: 27 Apr 2000

See all articles by Abhijit V. Banerjee

Abhijit V. Banerjee

Massachusetts Institute of Technology (MIT) - Department of Economics

Esther Duflo

Massachusetts Institute of Technology (MIT) - Department of Economics; Abdul Latif Jameel Poverty Action Lab (J-PAL); National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR); Bureau for Research and Economic Analysis of Development (BREAD)

Date Written: July 1999

Abstract

This paper examines evidence of the role that reputation plays in determining contractual outcomes. We conduct an empirical analysis of the Indian customized software industry. We analyze a data set containing detailed information about 230 projects carried out by 125 software firms that we had previously collected. The evidence supports the view that reputation matters. Ex ante contracts as well as the outcome after ex-post renegotiation vary with firms? characteristics plausibly associated with reputation. We argue that this pattern is not consistent with optimal risk sharing and propose a model of the industry where reputation determines contractual outcomes, whose predictions are consistent with several facts observed in the data. We argue that there is no obvious alternative explanation to the patterns present in the data.

Key words: Reputation, contracting, software

JEL Classification: L22, L86

Suggested Citation

Banerjee, Abhijit V. and Duflo, Esther, Reputation Effects and the Limits of Contracting: A Study of the Indian Software Industry (July 1999). MIT Department of Economics Working Paper No. 99-14. Available at SSRN: https://ssrn.com/abstract=195731 or http://dx.doi.org/10.2139/ssrn.195731

Abhijit V. Banerjee (Contact Author)

Massachusetts Institute of Technology (MIT) - Department of Economics ( email )

50 Memorial Drive
Room E52-252D
Cambridge, MA 02142
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617-253-8855 (Phone)
617-253-6915 (Fax)

Esther Duflo

Massachusetts Institute of Technology (MIT) - Department of Economics ( email )

50 Memorial Drive
Room E52-544
Cambridge, MA 02139
United States
617-258-7013 (Phone)
617-253-6915 (Fax)

Abdul Latif Jameel Poverty Action Lab (J-PAL) ( email )

Cambridge, MA
United States

HOME PAGE: http://www.povertyactionlab.org/

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Bureau for Research and Economic Analysis of Development (BREAD) ( email )

Duke University
Durham, NC 90097
United States

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