Nicholas S. Argyres , Janet Bercovitz and Kyle J. Mayer

1. Complementarity and Evolution of Contractual Provisions: An Empirical Study of IT Services Contracts Nicholas S. Argyres, Janet Bercovitz and Kyle J. Mayer Presenter: Wen ZHENG

2. Research Question • How learning processes are reflected in systematic relationships between contingency planning and task description contractual provisions?

3. Research Question • 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.

4. Research Question • 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.

5. Why this question? • 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.

6. Theory • Transaction cost theories of contract design • Learning and complements • Partner-Specific Learning

7. Theory • 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.

8. Theory • 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

9. Theory • Learning and Complements • Complements? Substitute?

10. Theory • Learning and Complements • Complements? Substitute? • Agency Theory Substitute

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

12. Theory • 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.

13. Theory • 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.

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

15. Hypothesis • 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

16. Hypothesis • 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

17. Data • Firm: Compustar • Period: 1986-1998 • 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

18. Variables • Binary Variable • 0: contract contains no contingency planning. • 1: contract contains contingency planning

19. Variables • Binary Variable • 0: contract contains no contingency planning. • 1: contract contains contingency planning

20. Variables • 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

21. Variables • 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.

22. Variables

23. Variables

24. Models • Basic OLS Model • Basic Probit Model

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

26. Results • OLS Estimates, Models of task Description Details

27. Results • OLS Estimates, Models of task Description Details

28. Results • OLS Estimates, Models of task Description Details H1

29. Results • OLS Estimates, Models of task Description Details

30. Results • OLS Estimates, Models of task Description Details H2A

31. Results • OLS Estimates, Models of task Description Details

32. Results • OLS Estimates, Models of task Description Details H3B

33. Results • MLE, Probit Model of Contingency Planning

34. Results • MLE, Probit Model of Contingency Planning

35. Results • MLE, Probit Model of Contingency Planning H1

36. Results • MLE, Probit Model of Contingency Planning

37. Results • MLE, Probit Model of Contingency Planning H2B

38. Results • MLE, Probit Model of Contingency Planning

39. Results • MLE, Probit Model of Contingency Planning H3A

40. Results

41. Results

42. Results

43. Results

44. Results

45. Findings • 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.

46. Limitation • 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.

47. Future Research • 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.