Determinants of Inter Firm Contractual Relations: A Case of Indian Software Industry

17 Pages Posted: 29 Nov 2005

See all articles by Francis Rathinam

Francis Rathinam

International Initiative for Impact Evaluation (3ie)

Date Written: November 2004


We analyze the impediments to inter-firm contractual relations, existing formal and informal ways of getting around them, especially the role of reputation and trust in mitigating the conflict of interest between the firms. We study it in the context of Indian IT industry. Contract design is specified as a function of reputation (age, repeated contracts and quality certification), asset specificity, complexity and uncertainty. We test the likelihood of observing Time & Material contract, a better propertied contract in the face of uncertainty. Empirical evidence confirms the propositions posited. Reputed firms tend to get highly complicated and uncertain projects. Asset specific investments do not seem to have any implication on contract type and complexity. The results broadly hint that the firms reckon more on creating an understanding through formal quality certifications to solve pre-contractual adverse selection problems and repeated contracting to solve the problems of behavioral uncertainties rather than relying on the court.

Keywords: Transaction Cost, Inter-firm Contractual Relations, Reputation, Trust and Outsourcing

JEL Classification: D23, L14, L22

Suggested Citation

Rathinam, Francis Xavier, Determinants of Inter Firm Contractual Relations: A Case of Indian Software Industry (November 2004). Available at SSRN: or

Francis Xavier Rathinam (Contact Author)

International Initiative for Impact Evaluation (3ie) ( email )

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