When Penalty Fails: Modeling Contractual Misincentives With Evidence From Portugal ITO Agreements
A misincentive is characterized as an incentive producing the opposite effect of motivating or preventing some specific action. In some circumstances, contract penalties such as sanctions and fines on late delivery or low-quality software encourage the irregularities instead of preventing them from...
| Main Authors: | , , , , |
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| Format: | Article |
| Language: | English |
| Published: |
SAGE Publishing
2022-12-01
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| Series: | SAGE Open |
| Online Access: | https://doi.org/10.1177/21582440221141850 |
| _version_ | 1798006907639693312 |
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| author | Thyago Celso Cavalcante Nepomuceno Késsia Thais Cavalcanti Nepomuceno Thiago Poleto Victor Diogho Heuer de Carvalho Ana Paula Cabral Seixas Costa |
| author_facet | Thyago Celso Cavalcante Nepomuceno Késsia Thais Cavalcanti Nepomuceno Thiago Poleto Victor Diogho Heuer de Carvalho Ana Paula Cabral Seixas Costa |
| author_sort | Thyago Celso Cavalcante Nepomuceno |
| collection | DOAJ |
| description | A misincentive is characterized as an incentive producing the opposite effect of motivating or preventing some specific action. In some circumstances, contract penalties such as sanctions and fines on late delivery or low-quality software encourage the irregularities instead of preventing them from occurring. The present study models misincentive behaviors in Information Technology Outsourcing (ITO) transactions as a Principal-Agent problem. Considering the non-linear relationship in software vendors’ cost structure and the client’s sensitivity to the product/service quality and delivery time, we offer theoretical modeling elucidating the best responses on agreements under incomplete and asymmetric information. Some empirical evidence of contractual misincentives is reported in outsourcing arrangements between private institutions and public administrations in Portugal. The contracts were divided into three categories: pure contracts with no incentive clauses, contracts with no explicit monetary penalties, and contracts under explicit sanctions. The results suggest that the knowledge of the penalty reduces the Agent’s uncertainty about the Principal’s cost structure and might lead them to intentionally delay the delivery of the technology. |
| first_indexed | 2024-04-11T13:01:56Z |
| format | Article |
| id | doaj.art-b4acc24c7eaa499e8427c70d337d5aaf |
| institution | Directory Open Access Journal |
| issn | 2158-2440 |
| language | English |
| last_indexed | 2024-04-11T13:01:56Z |
| publishDate | 2022-12-01 |
| publisher | SAGE Publishing |
| record_format | Article |
| series | SAGE Open |
| spelling | doaj.art-b4acc24c7eaa499e8427c70d337d5aaf2022-12-22T04:22:54ZengSAGE PublishingSAGE Open2158-24402022-12-011210.1177/21582440221141850When Penalty Fails: Modeling Contractual Misincentives With Evidence From Portugal ITO AgreementsThyago Celso Cavalcante Nepomuceno0Késsia Thais Cavalcanti Nepomuceno1Thiago Poleto2Victor Diogho Heuer de Carvalho3Ana Paula Cabral Seixas Costa4Federal University of Pernambuco, Caruaru, BrazilFederal University of Pernambuco, Recife, BrazilFederal University of Pará, Belém, BrazilFederal University of Alagoas, Delmiro Gouveia, BrazilFederal University of Pernambuco, Recife, BrazilA misincentive is characterized as an incentive producing the opposite effect of motivating or preventing some specific action. In some circumstances, contract penalties such as sanctions and fines on late delivery or low-quality software encourage the irregularities instead of preventing them from occurring. The present study models misincentive behaviors in Information Technology Outsourcing (ITO) transactions as a Principal-Agent problem. Considering the non-linear relationship in software vendors’ cost structure and the client’s sensitivity to the product/service quality and delivery time, we offer theoretical modeling elucidating the best responses on agreements under incomplete and asymmetric information. Some empirical evidence of contractual misincentives is reported in outsourcing arrangements between private institutions and public administrations in Portugal. The contracts were divided into three categories: pure contracts with no incentive clauses, contracts with no explicit monetary penalties, and contracts under explicit sanctions. The results suggest that the knowledge of the penalty reduces the Agent’s uncertainty about the Principal’s cost structure and might lead them to intentionally delay the delivery of the technology.https://doi.org/10.1177/21582440221141850 |
| spellingShingle | Thyago Celso Cavalcante Nepomuceno Késsia Thais Cavalcanti Nepomuceno Thiago Poleto Victor Diogho Heuer de Carvalho Ana Paula Cabral Seixas Costa When Penalty Fails: Modeling Contractual Misincentives With Evidence From Portugal ITO Agreements SAGE Open |
| title | When Penalty Fails: Modeling Contractual Misincentives With Evidence From Portugal ITO Agreements |
| title_full | When Penalty Fails: Modeling Contractual Misincentives With Evidence From Portugal ITO Agreements |
| title_fullStr | When Penalty Fails: Modeling Contractual Misincentives With Evidence From Portugal ITO Agreements |
| title_full_unstemmed | When Penalty Fails: Modeling Contractual Misincentives With Evidence From Portugal ITO Agreements |
| title_short | When Penalty Fails: Modeling Contractual Misincentives With Evidence From Portugal ITO Agreements |
| title_sort | when penalty fails modeling contractual misincentives with evidence from portugal ito agreements |
| url | https://doi.org/10.1177/21582440221141850 |
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