Management Control for Market Transactions: The Relation between Transaction Characteristics, Incomplete Contract Design and Subsequent Performance
Management Science, Vol. 51, No.12, December 2005
48 Pages Posted: 31 Jan 2004
Using an unusually comprehensive database on 858 transactions for information technology products and accompanying services, we study how close partners who are exposed to opportunistic hazards structure and control a significant transaction. We analyze data on the terms of contracting to determine whether transaction and supplier characteristics that generate management control problems are related to the formal control structure. We also examine whether misalignment between these characteristics and the control structure is associated with ex post performance problems. Transaction costs are found to be positively related to contract extensiveness. Factor analysis of the use of 24 contract terms reveals four groups of contract terms that are commonly used in combination. We interpret these factors as dimensions of management control and label them: assignment of rights, product and pricing, after-sales service, and legal recourse. Transaction costs are positively related to the use of all four dimensions of management control with different hazards associated with different controls. We then examine the relation between transaction costs and ex post transaction problems, demonstrating that even in the presence of mutually agreeable contracts, hazards remain. We also conclude that costs of contracting are associated with increased use of three of the four dimensions of management control. Finally, we present evidence that management control structures that are better aligned with transaction hazards mitigate subsequent performance problems, though at a nontrivial cost of contracting.
Keywords: Management control, contingency theory, contracting, transaction costs, information technology
JEL Classification: D23, L14, L22, L86, M10, M40, M46
Suggested Citation: Suggested Citation