Nicholas S. Argyres, Janet Bercovitz and Kyle J. Mayer Presenter: Wen ZHENG

How learning processes are reflected in systematic relationships between contingency planning and task description contractual provisions?

Contingency planning clauses are defined as the parts of a contract that are designed to support within-agreement adjustments by proscribing the ways in which the contractual partners will deal with problematic contingencies that might arise during the execution of the contract.

How learning processes are reflected in systematic relationships between contingency planning and task description contractual provisions? The contract can include more detailed specification of the task to be completed.

Systematic theoretical and empirical research of how contract are actually designed and how their structure evolve is limited. Empirical research fails to investigate the evolutionary patterns in contract structure and mechanisms of learning to contract.

Transaction cost theories of contract design Learning and complements Partner-Specific Learning

Transaction Cost Theories of Contract Design TCE theory of contract design is premised on idea about the functions of contracts that were first emphasized in legal literature. Business contracts are designed for the purpose of facilitating a transaction between two parties.

Transaction Cost Theories of Contract Design The TCE theory of contracting assumes that parties to a contract have bounded rationality that prevent them from foreseeing all possible future contingencies that may arise. Contract terms should reflect certain key characteristics of the transaction. Degree of bilateral dependency Degree to which property rights to assets Safeguard

Learning and Complements Complements? Substitute?

Learning and Complements Complements? Substitute? Agency Theory Substitute

Learning and Complements Complements? Substitute? Agency Theory Substitute Organization theory Complements Traditional idea Contemporary idea Dynamic way of thinking Cross-Provisional learning

Learning and Complements Complements? Substitute? Agency Theory Substitute Organization theory Complements Traditional idea Contemporary idea Dynamic way of thinking Cross-Provisional learning As they develop one category of contractual provisions for a given contract, the contracting parties may gain understandings about transaction features that are useful in the design of a different category of contractual provisions.

Partner-Specific Learning Partners with longer history of working together tend to write more detailed contracts? Reduce the cost to contain more detailed task description and contingency planning. Ensure the relationship will not terminated.

H1: Contingency planning and task descriptions have reciprocal positive effect on one another. Complementary

H2A: Prior experience with contingency planning is associated more detailed task description in subsequent contracts between the same firms. H2B: More detailed task description in prior contracts is positively associated with contingency planning in subsequent contracts between the same firms. Cross-provisional Learning

H3A (B): As an exchange relationship between two parties continues, the parties will be more likely to include contingency planning (more detailed task description) in their contracts with each other Partner-Specific Learning

Firm: Compustar Period: Sample: 405 agreement, 25% According to the first letters of the customers name unbiased sample Remove 8 contracts with missing data, and 11 with abandoned type

Dependent and Explanatory Variable Contingency planning Task Description Relationship History Binary Variable 0: contract contains no contingency planning. 1: contract contains contingency planning

Dependent and Explanatory Variable Contingency planning Task Description Relationship History Binary Variable 0: contract contains no contingency planning. 1: contract contains contingency planning

Dependent and Explanatory Variable Contingency planning Task Description Relationship History 1-7 Liket-type scale 1: contract include very little details in the description of the task to be completed. 7: contract contains very extensive technical description

Dependent and Explanatory Variable Contingency planning Task Description Relationship History Capture partner-specific learning over time Measures the amount of time in weeks that Compustar had worked with a particular business unit of a partner company prior to signing the contract.

Control Variable NameVariable DescriptionPredicted Effect Mainframe Measure the degree of uncertainty associated with project Coded as one if Compustar would be working with the buyers mainframe computer and otherwise zero. Contingency: +/- /= Task: +/-/= Measurement Cost Identify whether the technology used in the project makes it difficult to verify the quality of the output Coded as one if quality is difficult to determine and zero if it is readily apparent. Contingency: - Task: +/-/= Programming Coded as one if project requires programming and zero otherwise Contingency: no Task: - Previous Fixed Fee Measures aspects of incentive structure of the contracts Fixed fee takes the value of one if the contract was based on a fixed fee and zero otherwise.Previous fixed fee is the number of fixed-fee contracts that parties to a given contract have used in the past Contingency: no Task: +

Control Variable (Continued) Variable NameVariable DescriptionPredicted Effect Interdependence Control for the potential for holdup in each project Coded as one if customer personnel are listed as being responsible for some portion of the project deliverables and zero otherwise. Contingency :+ Task : + Dollar value Control for the total money value of the project Enter as log value since it is highly screwed. Time Account for time trends and measure the passage of time from 1986 to Zero for 1986, one for 1987 etc. Innovation Captures the degree to which the project required innovation from Compustar. A seven point Likert-type scale. Contingency: - Task: +

Basic OLS Model Basic Probit Model

Task Description a.Likert-scale measure Continuous variable b.Endogeneity Problem Durbin-Wu-Hausman c.2SLS Regression model Ivendog Contingency Planning a.Endogeneity Problem Smith-Blundell test (Probexog) b.Instrument Predicted value for task description

OLS Estimates, Models of task Description Details

H1

OLS Estimates, Models of task Description Details

H2A

OLS Estimates, Models of task Description Details

H3B

MLE, Probit Model of Contingency Planning

H1

MLE, Probit Model of Contingency Planning

H2B

MLE, Probit Model of Contingency Planning

H3A

Contingency Planning and task description tend to act as complements in contract design, this complementarity likely results from learning spillovers between these two categories of contractual provisions. Unexpected finding: Task Description tended to become less detailed over time. The development of a relationship between Compustar and a given customer had a positive, though insignificant, effect on the detail of the task description.

Lack measure of trust and a long enough sample period Unable to test whether trust effects dominate the learning effects over time. Lack data on performance of the project Unable to evaluate whether increases in one tended to lead to better performance when the level of the other is higher.

Explore relationship of other important contract provisions. (e.g., IPR in Biotechnology contract, payment terms) Examine when different components of a contract as well as components between those components have a greater effect performance.