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

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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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