ABSTRACT
Abstract: Drawing predominantly from organizational economics, current research on outsourcing contracts has focused on designing contract structures to align the incentives of outsourcing parties, and address the issues of adverse selection and moral hazard. This perspective of information technology (IT) contracting is unnecessarily narrow, as it fails to acknowledge the valuable role of contracts as a managerial governance mechanism. In this chapter, we propose a conceptual framework that adds hierarchical and psychological contractual elements to existing contract structures. Hierarchical elements emulate the social structures underlying hierarchical governance mechanisms and provide a useful means to address the limitations of market exchanges. The psychological contract, representing the client’s and vendor’s beliefs and expectations about their mutual obligations in outsourcing, governs the behaviors of and interactions between the parties.
