Contracting with opportunistic partners: Theory and application to technology development and innovation

Pablo Casas Arce, Thomas Kittsteiner, F. Asís Martínez-Jerez

    Research output: Contribution to journalArticle

    Abstract

    After a contract is signed, contracting partners may engage in opportunistic behavior aimed at circumventing the original intention of the agreement governing their business relationship, complying with the letter but not the spirit of the contract. We use an incomplete contracts approach to show that the anticipation and observability of such behavior are typically not enough to prevent it when parties can renegotiate contractual outcomes. This is because contractually specified incentives inevitably have conflicting effects: they simultaneously increase the likelihood of welfare-improving investments and welfare-reducing opportunistic behavior. The possibility of such opportunism thus limits the effectiveness of contractual incentives. We also discuss how our results relate to contracting practices observed in industries characterized by rapid innovation, such as information technology.

    Original languageEnglish (US)
    Pages (from-to)842-858
    Number of pages17
    JournalManagement Science
    Volume65
    Issue number2
    DOIs
    StatePublished - Feb 1 2019

    Fingerprint

    Opportunistic behavior
    Technology innovation
    Incentives
    Technology development
    Contracting
    Anticipation
    Innovation
    Business relationships
    Incomplete contracts
    Industry
    Observability
    Opportunism

    Keywords

    • Incomplete contracts
    • Innovation
    • Opportunism

    ASJC Scopus subject areas

    • Strategy and Management
    • Management Science and Operations Research

    Cite this

    Contracting with opportunistic partners : Theory and application to technology development and innovation. / Casas Arce, Pablo; Kittsteiner, Thomas; Asís Martínez-Jerez, F.

    In: Management Science, Vol. 65, No. 2, 01.02.2019, p. 842-858.

    Research output: Contribution to journalArticle

    Casas Arce, Pablo ; Kittsteiner, Thomas ; Asís Martínez-Jerez, F. / Contracting with opportunistic partners : Theory and application to technology development and innovation. In: Management Science. 2019 ; Vol. 65, No. 2. pp. 842-858.
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