Contract Design Choices and the Balance of Ex-Ante and Ex-Post Transaction Costs in Software Development Outsourcing

MIS Quarterly Vol. 40 No. 1, March 2016

46 Pages Posted: 6 Jan 2016

See all articles by Michel Benaroch

Michel Benaroch

Syracuse University - Whitman School of Management

Yossi Lichtenstein

City University London - Sir John Cass Business School

Lior Fink

Ben-Gurion University of the Negev

Date Written: September 15, 2015

Abstract

This paper examines multiple contract design choices in the context of transaction and relational attributes and consequent ex-ante and ex-post transaction costs. It focuses on two understudied themes in the IT outsourcing literature. First, while the literature is predominantly concerned with opportunism and consequent ex-post hazard costs that contracts can safeguard against, parties to a contract also economize on ex-ante transaction costs by their choice of contract type and contract extensiveness. Second, the literature studies the aggregate extensiveness of contracts rather than of distinct contract functions – safeguarding, coordination, and adaptability. Against this backdrop, our research model portrays a nuanced picture that is anchored in the following theoretical interpretation: transaction and relational attributes have implications on specific ex-ante and ex-post transaction costs, and these implications can be balanced by respective choices in both contract type and the extensiveness of specific contract functions. These two contract design choices complement and substitute for each other in their ability to economize on specific transaction costs. Our analysis of 210 software development outsourcing contracts finds that explanatory power increases when analyzing the extensiveness of individual contract functions rather than the aggregate contract extensiveness, highlighting subtle competing influences that are otherwise masked by an aggregate measure. Our analysis also shows that a preference for Time-and-Material contracts counteracts the effect of certain transaction attributes on contract extensiveness, and even cancels it out in the case of transaction uncertainty.

Keywords: Contract functions (safeguarding, coordination, adaptability), contract extensiveness, contract type, ex ante and ex post transaction costs, transaction cost economics, software development outsourcing

Suggested Citation

Benaroch, Michel and Lichtenstein, Yossi and Fink, Lior, Contract Design Choices and the Balance of Ex-Ante and Ex-Post Transaction Costs in Software Development Outsourcing (September 15, 2015). MIS Quarterly Vol. 40 No. 1, March 2016, Available at SSRN: https://ssrn.com/abstract=2711771

Michel Benaroch (Contact Author)

Syracuse University - Whitman School of Management ( email )

721 University Avenue
Syracuse, NY 13244-2130
United States

Yossi Lichtenstein

City University London - Sir John Cass Business School ( email )

106 Bunhill Row
London, EC1Y 8TZ
United Kingdom

Lior Fink

Ben-Gurion University of the Negev ( email )

1 Ben-Gurion Blvd
Beer-Sheba 84105, 84105
Israel

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