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

Arturs Kalnins

The Journal of Law, Economics, and Organization, 2004, vol. 20, issue 1, 207-229

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. Copyright 2004, Oxford University Press.

Date: 2004
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