The Role of Decision Rights in Codevelopment Initiatives

Abstract

Problem definition: How should decision rights be allocated between firms occupying different positions in the value chain to maximize the value of a codevelopment project? Academic/practical relevance: We contribute to the operations management literature on the benefits and challenges of codevelopment initiatives by looking at the design of optimal governance structures that specify the allocation of rights to make certain decisions. Our problem is motivated by real-world challenges observed in codevelopment project initiation discussions between technology companies. Methodology: We utilize a game-theoretic model to study the allocation of the ex ante right to set the contract terms and the ex post right to choose which contract to implement, once the market potential is realized. Results: First, we find that delegating more control to a party does not necessarily imply that the party will be incentivized to exert greater effort. Specifically, we show that allocating both rights to the seller as opposed to only the ex ante right actually reduces the seller’s effort. Second, when the buyer has low bargaining power, the ex post decision right should be delegated to the seller, that is, the party with lower exposure to the effort-contingent outcome. Otherwise, the ex post decision right should be delegated to the buyer but the ex ante right should be held by the seller. Finally, we show that simple contracts with decision rights outperform a spot contract when the ex post bargaining power of one of the parties is substantially higher. Managerial implications: Our results offer insights for how managers should structure the optimal governance structure for codevelopment projects. We also identify when and how companies should delegate rights to their partners to maximize the value of the project. We show that the optimal governance structure depends crucially on the position in the value chain of the party with the higher bargaining power.