Hart’s New Approach to Contracts

An illuminating article in the Harvard Business Review.

An excerpt:

Imagine that a supplier of engineering services submits a proposal in a competitive bidding process and wins the contract. If demand is lower during the term of the contract than the buyer stated in the RFP or the scope expands in an unanticipated area, the supplier’s profit will take a hit. If the buyer refuses to adjust the supplier’s fee or the statement of work, the supplier may try to recoup losses by, for example, replacing the expensive A team it currently has on the project with its less costly C team. In long-term, complex deals, shading can be so pervasive that the tit-for-tat behavior becomes a death spiral. Oliver and Moore’s expanded theory focuses on contracts as reference points, a new perspective that emphasizes the need for mechanisms to continually align expectations—or update reference points—as unanticipated events occur and needs change over time.

And here’s the paper that put Hart on the map. Over 13,000 citations.

Published by

Caleb Fuller

Assistant Professor of Economics, Grove City College.

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