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Complementarity and Evolution of Contractual Provisions: An Empirical Study of IT Services Contracts
Nicholas S. Argyres, Janet Bercovitz and Kyle J. Mayer
Presenter: Wen ZHENG
How learning processes are reflected in systematic relationships between contingency planning and task description contractual provisions?
Research Question
How learning processes are reflected in systematic relationships between contingency planning and task description contractual provisions?
Research Question
Contingency planning clauses are defined as the parts of a contract that are designed to support within-agreement adjustments by proscribing the ways in which the contractual partners will deal with problematic contingencies that might arise during the execution of the contract.
How learning processes are reflected in systematic relationships between contingency planning and task description contractual provisions?
Research Question
The contract can include more detailed specification of the task to be completed.
Systematic theoretical and empirical research of how contract are actually designed and how their structure evolve is limited.
Empirical research fails to investigate the evolutionary patterns in contract structure and mechanisms of learning to contract.
Why this question?
Transaction cost theories of contract design
Learning and complements
Partner-Specific Learning
Theory
Transaction Cost Theories of Contract Design
◦ TCE theory of contract design is premised on idea about the functions of contracts that were first emphasized in legal literature.
Theory
Business contracts are designed for the purpose of facilitating a transaction between two parties.
Transaction Cost Theories of Contract Design
◦ The TCE theory of contracting assumes that parties to a contract have bounded rationality that prevent them from foreseeing all possible future contingencies that may arise.
Theory
Contract terms should reflect certain key characteristics of the transaction. • Degree of bilateral dependency•Degree to which property rights to assets
Safeguard
Learning and Complements◦ Complements? Substitute?
Theory
Learning and Complements◦ Complements? Substitute?
Agency Theory Substitute
Theory
Learning and Complements◦ Complements? Substitute?
Agency Theory Substitute Organization theory Complements
Traditional idea Contemporary idea
Dynamic way of thinking Cross-Provisional learning
Theory
Learning and Complements◦ Complements? Substitute?
Agency Theory Substitute Organization theory Complements
Traditional idea Contemporary idea
Dynamic way of thinking Cross-Provisional learning
Theory
As they develop one category of contractual provisions for a given contract, the contracting parties may gain understandings about transaction features that are useful in the design of a different category of contractual provisions.
Partner-Specific Learning
◦ Partners with longer history of working together tend to write more detailed contracts?
Reduce the cost to contain more detailed task description and contingency planning.
Ensure the relationship will not terminated.
Theory
H1: Contingency planning and task descriptions have reciprocal positive effect on one another.
Hypothesis
Complementary
H2A: Prior experience with contingency planning is associated more detailed task description in subsequent contracts between the same firms.
H2B: More detailed task description in prior contracts is positively associated with contingency planning in subsequent contracts between the same firms.
Hypothesis
Cross-provisional Learning
H3A (B): As an exchange relationship between two parties continues, the parties will be more likely to include contingency planning (more detailed task description) in their contracts with each other
Hypothesis
Partner-Specific Learning
Firm: Compustar Period: 1986-1998 Sample: 405 agreement, 25%
◦ According to the first letters of the customers name
unbiased sample
◦ Remove 8 contracts with missing data, and 11 with abandoned type
Data
Variables
Dependent and Explanatory
Variable
Contingency planning
Task Description
Relationship History
•Binary Variable•0: contract contains no contingency planning.1: contract contains contingency planning
Variables
Dependent and Explanatory
Variable
Contingency planning
Task Description
Relationship History
•Binary Variable•0: contract contains no contingency planning.1: contract contains contingency planning
Variables
Dependent and Explanatory
Variable
Contingency planning
Task Description
Relationship History
•1-7 Liket-type scale• 1: contract include very little details in the description of the task to be completed.7: contract contains very extensive technical description
Variables
Dependent and Explanatory
Variable
Contingency planning
Task Description
Relationship History
• Capture partner-specific learning over time•Measures the amount of time in weeks that Compustar had worked with a particular business unit of a partner company prior to signing the contract.
VariablesControl Variable
Name Variable Description Predicted Effect
Mainframe •Measure the degree of uncertainty associated with project•Coded as one if Compustar would be working with the buyer’s mainframe computer and otherwise zero.
Contingency: +/-/=
Task: +/-/=
Measurement Cost
•Identify whether the technology used in the project makes it difficult to verify the quality of the output•Coded as one if quality is difficult to determine and zero if it is readily apparent.
Contingency: -
Task: +/-/=
Programming •Coded as one if project requires programming and zero otherwise
Contingency: noTask: -
Previous Fixed Fee
•Measures aspects of incentive structure of the contracts• Fixed fee takes the value of one if the contract was based on a fixed fee and zero otherwise.Previous fixed fee is the number of fixed-fee contracts that parties to a given contract have used in the past
Contingency: no
Task: +
VariablesControl Variable (Continued)
Variable Name
Variable Description Predicted Effect
Interdependence •Control for the potential for holdup in each project•Coded as one if customer personnel are listed as being responsible for some portion of the project deliverables and zero otherwise.
Contingency :+
Task : +
Dollar value •Control for the total money value of the project•Enter as log value since it is highly screwed.
Time •Account for time trends and measure the passage of time from 1986 to 1998.•Zero for 1986, one for 1987 etc.
Innovation • Captures the degree to which the project required innovation from Compustar. •A seven point Likert-type scale.
Contingency: -
Task: +
Models Basic OLS Model
Basic Probit Model
Task Description
a. Likert-scale measure Continuous variable
b. Endogeneity Problem Durbin-Wu-Hausman
c. 2SLS Regression model Ivendog
Contingency Planning
a. Endogeneity Problem Smith-Blundell test (Probexog)
b. Instrument Predicted value for task description
Methodology
OLS Estimates, Models of task Description Details
Results
OLS Estimates, Models of task Description Details
Results
OLS Estimates, Models of task Description Details
Results
H1
OLS Estimates, Models of task Description Details
Results
OLS Estimates, Models of task Description Details
Results
H2A
OLS Estimates, Models of task Description Details
Results
OLS Estimates, Models of task Description Details
Results
H3B
MLE, Probit Model of Contingency Planning
Results
MLE, Probit Model of Contingency Planning
Results
MLE, Probit Model of Contingency Planning
Results
H1
MLE, Probit Model of Contingency Planning
Results
MLE, Probit Model of Contingency Planning
Results
H2B
MLE, Probit Model of Contingency Planning
Results
MLE, Probit Model of Contingency Planning
Results
H3A
Results
Results
Results
Results
Results
Contingency Planning and task description tend to act as complements in contract design, this complementarity likely results from learning spillovers between these two categories of contractual provisions.
Unexpected finding: Task Description tended to become less detailed over time.
The development of a relationship between Compustar and a given customer had a positive, though insignificant, effect on the detail of the task description.
Findings
Lack measure of trust and a long enough sample period
Unable to test whether trust effects dominate the learning effects over time.
Lack data on performance of the project Unable to evaluate whether increases in one tended
to lead to better performance when the level of the other is higher.
Limitation
Explore relationship of other important contract provisions. (e.g., IPR in Biotechnology contract, payment terms)
Examine when different components of a contract as well as components between those components have a greater effect performance.
Future Research