A transaction cost analysis of hybrid forms of contracting: Implications for prediction and performance

Transaction Cost Economics (TCE) theories of exchange have proven to be a useful tool for understanding a variety of economic relationships. The TCE model has been especially useful in explaining the boundaries of economic institutions with regard to "make" or "buy" decisions.;However, the markets and hierarchies paradigm has been limited in explaining non-market and non-hierarchical relationships which are termed "hybrid" forms of governance. TCE theory indicates that as assets become more specific, uncertainty becomes more acute and transactions become incomplete, the hierarchical form of governance becomes predominant. However, evidence suggests this is not the case where long-term contracts substitute for either the market or hierarchy form of governance. Long-term contracts suffice if they sufficiently allow parties to maintain control of the transaction through the contract.;The purpose of this study was to explore the relationship between TCE transaction dimensions, types of contracts and performance. This research develops a new governance construct called "Contract Incompleteness" that identifies the degree of incompleteness in stating requirements of transactors in a long-term relationship.;A correlational research design was used to compare groups. The grouping variable was type of contract. Hypotheses from transaction-cost and contract theory were tested using archival data from multiple Department of Defense (DoD) research and development contracts. The sample consisted of 240 contracts used in the procurement of products for the DoD.;Results indicated that contract type is an important determinant of transaction cost and performance dimensions. Incentive type contracts were significantly different from firm-fixed price and cost-plus contracts on the uncertainty variable. Firm-fixed price transactions were the most complex and explicit. Incentive type contracts were significantly different from the other two contracts on the design change measure. Cost-plus contracts differed significantly from fixed-price and incentive type contracts along the human asset specificity and quality measure. Incentive-type contracts were significantly different from the other two groups along the dedicated asset specificity measure. Theoretical implications are discussed.;The practical implications of this research has two important messages for managers: (1) contract type should be negotiated differently based on transaction cost dimensions, and (2) performance varies for different types of contracts.