The Role of Decision Rights in Collaborative Development Initiatives

Abstract

We study initiatives for novel co-development projects, where it may be difficult a priori to specify contracts contingent on the project outcome. In such settings, prior empirical work has shown that firms often rely on simple non-contingent contracts that specify the decision-making process by allocating decision rights. Our goal is to compare the effectiveness of such contractual structures in incentivizing co-operative efforts and maximizing the total value of the project. In our model, a seller and a buyer sign a simple price-only contract where the contract term is specified up front, while the trading level (i.e., quantity) is decided after the uncertainty is resolved. Our results bear several important implications for the optimal allocation of decisions rights and the value of contracting: First, we show that as the seller obtains more control over the project through the decision right(s), he exerts higher effort, at the expense of the buyer appropriating a lower share of the total gains. Second, we find that the total surplus is maximized when the ex-post decision right is delegated to the party that is a priori less sensitive to the uncertainty (i.e., the seller). Third, we show that transfers of ex-post bargaining power and allocation of decision rights can act as complements or substitutes, depending on the seller's cost structure. Finally, we show that simple contracts with a judicious allocation of decision rights are preferred over a spot contract when the ex-post bargaining power of the party with greater exposure to the uncertainty (i.e., the buyer) is high.

About the presenter

Nektarios (Aris) Oraiopoulos is a lecturer in the group of Operations Management at the Judge Business School, University of Cambridge. He received his B.S. degree in electrical and computer engineering from the National Technical University of Athens, and his PhD degree in operations management from the Georgia Institute of Technology. His research efforts are focused on how firms can improve their new product development (NPD) processes from the creation of new opportunities to the selection process to the implementation and development. His work has been invited for presentation in numerous conferences, and has been published in Management Science and Production and Operations Management.

More info about Prof. Oraiopoulos

About the Seminar

The KLU research seminar series is a regular meeting of PhD students, Post-Docs and professors who conduct research in the field of logistics and supply chain management. The research seminar is open to the public and we happily welcome guests.