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

Francis Rathinam ()

The IUP Journal of Financial Economics, 2008, vol. VI, issue 4, 73-85

Abstract: The impediments to inter-firm contractual relations, the existing formal and informal ways of getting around them and the role of reputation and trust in mitigating conflict of interest between firms in the context of Indian IT industry is analyzed in this paper. 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 and 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 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 a court of law.

Date: 2008
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