Contractual Complexity Research Articles

Trust and formal contracts in interorganizational relationships — substitutes and complements

AbstractWe hypothesize that trust is a moderator of the direct relationship between control and coordination concerns and contractual complexity. Our results suggest that high trust weakens the positive relationship between control concerns and contractual complexity and reinforces the positive relationship between coordination concerns and contractual complexity. By highlighting the dual role of contracts (i.e. a controlling and coordinating function) and the moderating role of trust in this regard, our paper provides a new focus to the current discussion on the relationship between trust and contracts (i.e. substitutes or complements) that may help reconcile some divergent perspectives in the literature. Copyright © 2007 John Wiley & Sons, Ltd.

Strategic alliance contracts: dimensions and determinants of contractual complexity

AbstractIn contrast to prior studies examining strategic alliances as discrete governance structures (e.g., alliances vs. M&A, equity vs. non‐equity agreements), we investigate their particular contractual features. The analysis examines the dimensionality of the contractual complexity construct and investigates the determinants of firms' adoption of various contractual provisions. We find two underlying dimensions of contractual complexity, based upon the enforcement and coordination functions of different contractual provisions. The evidence reveals that firms' usage of particular contractual provisions is a function of asset specificity as well as whether the alliance's duration is pre‐specified or open‐ended. The findings also speak to the debate surrounding the roles of prior ties and trust for alliance governance. Firms that have collaborated with each other in the past are not less likely to negotiate enforcement provisions; rather, repeat collaborators are less likely to adopt contractual provisions that are informational in nature and are geared to the coordination of the alliance. Copyright © 2007 John Wiley & Sons, Ltd.

“Make-or-buy” in movies: Integration and ex-post renegotiation

In this paper, I investigate the determinants of the boundaries of the firm in the movie industry using a new data set from the Spanish movie industry. These data document movie contractual renegotiation and allow me to construct a direct measure of contractual complexity for each movie. Linking this measure to the movie ownership structure, I find that movies renegotiated ex-post more often are more likely to be distributed ex-ante by integrated distributors and more likely to show in distributor-owned theaters. This is consistent with transaction cost economics theories of integration.

Contractual Functions and Contractual Dynamics in Inter-Firm Relationships: What We Know and How to Proceed

Research on the organization of inter-firm relationships has recently moved away from the discussion of equity- vs. non-equity-based forms of governance, turning now towards the examination of contractual design. However, empirical research on the contractual complexity of inter-firm relationships to date delivers a puzzle with contradicting findings. We claim that a disaggregate analysis of different contractual functions helps to overcome the identified inconsistencies. Thus, we conduct a comprehensive review of 22 top journals based on the methodology of David and Han (2004) in order to systematically assess the empirical evidence on the functions of contracts. Our review covers more than twelve years of studies, taking the landmark article of Parkhe (1993) as starting-point. In essence, our paper offers three main contributions to advance current research. First, we propose that inter-firm contracts serve three distinct functions, namely 'safeguarding' of the parties' investments, 'coordination' of the exchange process, and 'contingency adaptability' to cope with future disturbances. Second, we further disentangle the effects that experience gained from prior relationships has on contracts since researchers have raised contrary hypotheses on the impact of prior relationships, according to diverging foundations in trust- vs. learning-related theoretical models. Finally, we develop some research propositions on transaction- and experience-related determinants of the three contractual functions. In particular, we claim that experience gained from prior relationships has different effects on 'safeguarding' and 'contingency adaptability' as compared to the 'coordination' function of contracts.

Decentralization, Hierarchies, and Incentives: A Mechanism Design Perspective

Separation of ownership from management, multidivisional firm organizations, delegation of production decisions to worker teams, delegation of pricing and advertising decisions to retail franchisers, reliance on intermediaries in trade or finance, and distribution of regulatory authority across different agencies represent examples of organizations that delegate and distribute decision-making authority instead of centralizing it. This paper reviews literature on costs and benefits of delegated decision making in hierarchical organizations or contracting networks with regard to problems of incentives and coordination. It starts by describing incentive and coordination costs of delegation in simple canonical examples of hierarchies where both information and incentives of different decisionmakers differ. One class of models pertain to contexts where the classical Revelation Principle applies, i.e., where costs of contractual complexity, information processing, or communication are absent, agents do not collude, and the mechanism designer can commit to the mechanism. Delegation may conceivably entail a loss of control and coordination arising from the divergence of information and incentives. Sufficient and necessary conditions for this loss to be mitigated entirely include risk neutrality, top-down contracting, and monitoring of transfers or production assignments between subordinates. The next class of models introduces communication costs that restrict the performance of centralized arrangements relative to delegation owing to a resulting loss of flexibility, which has to be traded off against possible control losses of delegation. Finally, consequences of collusion among agents is discussed, which typically enlarge the range of circumstances under which delegation can attain optimal second-best outcomes. The paper concludes with a discussion of the relevance of this theoretical literature to recently emerging empirical studies of industrial organizations where delegated decision making plays an important role: adoption of innovative human resource management practices, new information technologies and retail franchising.

Entrepreneurial alliances as contractual forms

Advancing upon taxonomical research on interfirm alliances, we investigate the design of entrepreneurial firms' alliances in more fine-grained terms by focusing on the specific contractual provisions that firms negotiate into their alliance contracts. Drawing upon transaction cost arguments, we examine the determinants of the contractual complexity of collaborative agreements in the German telecommunications industry. The findings reveal that alliance contracts vary greatly in their complexity, yet contracts for non-equity alliances tend to be no more or less complex than those for equity alliances on average. Furthermore, multivariate findings on the roles of transaction-specific investment, relational capital, search costs, and so forth demonstrate that firms' contractual and governance choices have distinct antecedents.

Alliance Contractual Design

Our purpose in this paper is to provide an overview of what we know about alliance contracts. After a short introduction to the contents of alliance contracts, we start by contrasting alliance contractual form and governance form. Next, we focus on two related constructs: contractual complexity and contractual completeness. We suggest that contractual complexity is a more adequate construct to investigate in the absence of information about the transaction contemplated in the contract. After that, we present the measures of contractual complexity used in past studies. Then, we go over the determinants of contractual complexity by considering their influence on contracting costs and benefits given environmental and behavioral uncertainty. Conclusions and suggestions for research are offered at the end.

STRATEGIC ALLIANCES AS CONTRACTUAL FORMS.

We examine the contractual provisions firms use in designing strategic alliances. The study separates contractual forms from governance structures, explores the dimensionality of the contractual complexity construct, and draws upon transaction cost theory to develop and test hypotheses on the determinants of different safeguards firms incorporate into their collaborative agreements.

Competitive Bidding and the Production of Precontract Information

This note is concerned with the effects of contractual complexity on the precontract bidding process. Competitive bidding is seen to be a heterogeneous class of devices for transmitting information between organizations. Even for rather simple contracts (e.g., Demsetz' license plates contract), the purchaser is seldom interested solely in price -- he is interested in acquiring and providing information as well. For complex contracts, such as a fifteen-year cable television franchise, the information problems tend to dominate. The implications of locating the liability for provision of precontract information on providers and on purchasers are considered.