Management Science · 1992 · 176 citations · 9 references
BusinessBusiness EconomicsProject ManagementContract TheoryContractsSoftware EngineeringCommercial ContractsContract DesignContract ManagementOptimal ContractingContract Design Under Asymmetric InformationContract Incentive DesignContracting IncentivesContracting With Private InformationEquilibriumIncentive-based ContractingOptimal Contracting TheorySoftware Development Contracts
Software contracting involves legal, economic, managerial, and technological considerations, and uncertainty about costs or technology can lead developers to abandon projects midstream while users better know benefits, creating information asymmetry that makes parties vulnerable to opportunistic behavior. The paper reviews software development contracts and develops a game‑theoretic model to analyze incentive and information issues in software contracting. The model hires an outside contractor to develop a software system over multiple periods and incorporates incentive and information issues via game theory. The model yields a viable contract that aligns incentives and achieves the same equilibrium as in‑house development, and its implications are related to real contract cases.
Software contracting is a multi-faceted issue that involves legal, economic, managerial and technological considerations. To better understand the economic aspect of software contracting, this paper provides a summary review of software development contracts, followed by a gametheoretic model developed to incorporate incentive and information issues associated with software contracting. In the model an outside contractor is hired to develop a software system over multiple periods. Due to the uncertainties about costs or technology, the developer faces the risk of having to abandon the project at an intermediate phase. The user is better informed of the benefit of the system, while the developer privately discovers the development costs as the project advances. Given the limited information, the contracting parties make decisions in their own interest, leaving each party vulnerable to the other's opportunistic behavior. In this setting, we construct a viable contract that aligns the incentives of the contracting parties and produces the same equilibrium outcome as in in-house development. We also relate the implications of the model to the actual contract cases.
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The Design of Contracts and Remedies for Breach
Steven Shavell · The Quarterly Journal of Economics · 1984 · 170 citations
Business, Contract Law, Economics +15