Essays on contracts and corporate governance structure in the information technology industry

This dissertation consists of three essays that explore contracts and corporate governance structure issues in the information technology (IT) industry. The first essay shows that when the information technology service being provided is critical for the buyer, it is optimal for the buyer and seller to sign flexible contracts that incorporate future renegotiations instead of contracts with full commitment. Assuming the seller bears the cost of accommodating flexibility, the buyer can purchase “renegotiation right” from the seller ex ante, allowing Pareto-improving contract to emerge as an outcome.; The second essay further examines the timing issue of contracts for procuring information technology. Proper timing in contracts, which has largely been treated as exogenous in the literature, is the key to understand parties' decisions. With a game theoretic model, it shows that when uncertainty unfolds over time and contracts complete in the specification of timing are infeasible (or transaction costs of writing complete contract are prohibitively high), information asymmetry between contracting parties leads to inefficient investment decisions. In particular, premature investments will occur under certain conditions.; The third essay studies contracts within an information technology company rather than contracts between IT vendors and buyers and sheds light on the issue of corporate governance in the technology sector. Because of the innovative nature of new technologies and the uncertainties of their prospects, shareholders of technology companies can only form beliefs on the financial health of technology firms and rely on the information provided by the firms to update their expectations, while the executives of these firms have access to first-hand information regarding the real potential of the new technology. A multi-period game-theoretical model with asymmetric information-updating process is developed and in equilibrium executives compensated with stocks and stock options will manipulate and untruthfully report the information, causing the public to discount strong companies with superior technologies due to expectations of possible frauds. This constitutes a market failure in the high technology sector: it is highly costly for new technology companies to attract investments and in the extreme case investors completely abandon the investment opportunity on the new technology.