Relationships and Hybrid Contracts: An Analysis of Contract Choice in Information Technology

Posted: 19 Nov 2003

See all articles by Kyle Mayer

Kyle Mayer

University of Southern California - Management and Organization Department

Arturs Kalnins

Cornell University - School of Hotel Administration

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Abstract

Selecting the type of contract is an important aspect of governing interfirm transactions. The purpose of this article is to examine the use of fixed-fee and time-and-materials (T&M, or cost-plus) contracts and a hybrid contract that consists of a T&M contract with a cap. In addition to uncertainty and measurement factors, we also address a relatively unexplored aspect of contracting-how the prior relationship between the firms influences the type of contract the firms select. Using data on 394 contracts from the information technology (IT) services industry, we show that T&M contracts are preferred when the cost of measuring quality ex post is high and when it is difficult to estimate costs ex ante. We also find site-specific measures of relationship lead to a preference for low-powered T&M contracts.

Suggested Citation

Mayer, Kyle and Kalnins, Arturs, Relationships and Hybrid Contracts: An Analysis of Contract Choice in Information Technology. The Journal of Law, Economics, and Organization, Vol. 20, No. 1, pp. 207-229, 2004. Available at SSRN: https://ssrn.com/abstract=469943

Kyle Mayer (Contact Author)

University of Southern California - Management and Organization Department ( email )

Los Angeles, CA 90089
United States

Arturs Kalnins

Cornell University - School of Hotel Administration ( email )

545D Statler Hall
Ithaca, NY 14853-6902
United States

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