Managing Complex Contracts: A Theoretical Approach

Trevor L. Brown, Matthew Potoski, David Van Slyke

Research output: Contribution to journalArticle

48 Scopus citations

Abstract

When a product is difficult to specify in a contract and requires specialized investments for a market exchange, the buyer and seller can find themselves locked into a mutually dependent relationship in which both win-win and lose-lose outcomes are possible. This paper presents a theory of such complex contracting in the public sector and identifies the conditions that increase the likelihood of win-win outcomes for the buyer and the seller. Rules that allow parties to incentivize cooperative behavior increase the chances of a winning outcome. Relationships can promote cooperation if structured to incorporate repeated play and external reputations. Finally, contract success is contingent on mutual understanding between the two parties. Both the buyer and the seller need to understand the rules and the relationship in the same way in order for the exchange to deliver a win-win.

Original languageEnglish (US)
Pages (from-to)294-308
Number of pages15
JournalJournal of Public Administration Research and Theory
Volume26
Issue number2
DOIs
StatePublished - Apr 1 2016

ASJC Scopus subject areas

  • Sociology and Political Science
  • Public Administration
  • Marketing

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