Managing Complex Contracts: A Theoretical Approach

Trevor L. Brown · Matthew Potoski · David M. Van Slyke

172 citations0/0 files storedJournal of Public Administration Research and Theory

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Public Procurement and Policy Public Policy and Administration Research Outsourcing and Supply Chain Management

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.

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References

1990Governing the Commons 1981The Evolution of Cooperation 1992Governing the Commons: The Evolution of Institutions for Collective Action 1997The Tacit Dimension 1969The social psychology of organizing 1986The Costs and Benefits of Ownership: A Theory of Vertical and Lateral Integration 1988The Theory of Industrial Organization 1988Organizational Learning

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