Tuesday, December 27, 2005
There are methods for for contracting parties engaged in complex tasks to ensure performance that don't involve putting terms in the contract. They may rely on reputation, for example, or they might use pre-contract quality certification of vendors. Francis R. Xavier of the Department of Economics at Hyderabad University takes a look at this in Determinants of Inter Firm Contractual Relations: A Case of Indian Software Industry. Here's the abstract:
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.