Designing Contracts for Business Networks

Abstract

Economic activities within and between networked organizations can be coordinated via hierarchies (internal coordination) or markets (external coordination). There are theories that explain both agency theory (Jensen & Meckling, 1976) and transaction cost economics (Williamson, 1985). It is assumed that networked organizations design their organization and network of trading partners such that the sum of internal and external coordination costs is minimized. The impact of information technology (IT) has been assessed in different ways. Malone, Yates, and Benjamin (1987) expected that IT will lower transaction costs and lead to increased market coordination. Clemons, Reddi, and Row (1993, p. 9) posited that organizations will “move to the middle”, that is, to “more outsourcing, but from a reduced set of stable partnerships” if non-contractible issues such as quality and trust play an important role. Empirical evidence (Holland & Lockett, 1997) shows that companies often mix aspects from both markets and hierarchies.