Designing compensation plans with an appropriate level of incentives is a key decision faced by managers of direct sales forces. the authors use data on individual salesperson compensation contracts to show that firms design their pay plans to both discriminatingly select (i.e., attract and retain) salespeople and provide them with the right level of incentives. consistent with standard agency arguments, the authors find that firms use higher-powered incentives as the importance of agent effort increases. at the same time, the authors find strong support for the selection role of these contracts. specifically, agents with greater selling ability and lower risk aversion are associated with jobs offering higherpowered incentives. Finally, consistent with prior findings on incentive contracts, the authors find no support for the insurance implication of the typical agency model. the authors rule out alternative explanations for this anomalous result and find that the selection role of contracts best explains the result in their context.

I n this paper, we propose an approach to show how the capability-based perspective of the resource-based view of the firm can be integrated with the comparative-governance approach of transaction cost economics to shed light on governance issues in interfirm relationships. We argue that transacting parties create value not only through the employment of partner-specific investment and coordination activities but also through the employment of heterogeneous, firm-specific resources that each firm brings to the relationship and that, in turn, governance structures reflect a discriminating alignment with these two distinct forms of value-creating activities and resources. Our thesis is empirically tested in the context of industrial original equipment manufacturers employing branded component contracts with independent component vendors. Specifically, we investigate the conditions under which the price terms for branded components are agreed upon (more fixed) ex ante versus negotiated (more flexible) ex post. Our results offer two insights. First, the chosen governance form reflects a trade-off between safeguarding and adaptation motives even among parties engaged in cooperative relationships. Second, valuable, firm-specific resources that preexist outside of the exchange relationship are at stake in these cooperative yet contractually incomplete relationships. They, together with relationship-specific investments and activities, have a significant impact on governance design.

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Research summary: Acquiring knowledge on a partner's pre-existing resources plays an important yet ambiguous role in collaborative relationships. We formally model how contracts trade off productive and destructive uses of knowledge in a buyer-supplier relationship. We show that, when the buyer's pre-existing resources are vulnerable to the revelation of sensitive knowledge, the supplier overinvests in knowledge acquisition as it expects to use the knowledge as a threat in price negotiations. A non-renegotiable closed-price contract prevents such overinvestment and reduces the supplier's ability to expropriate the buyer ex post. Our results extend to the cases of renegotiable closed-price contracts, repeated interactions between a buyer and a supplier, and the use of nondisclosure policies. We draw theoretical, empirical, and managerial implications from our model. Managerial summary:This study yields new insights regarding the use of contract design in protecting pre-existing, nonrelationship specific assets in buyer-supplier arrangements. Anecdotal examples illustrate the "dark side" of these arrangements where opportunistic suppliers exploit knowledge of buyers' pre-existing resources to seek rent and appropriate value. When a supplier is likely to act harmfully, a closed-price contract that specifies the price of the supplier's component upfront may reduce the supplier's incentives to overinvest in acquiring and exploiting knowledge of the buyer's pre-existing resources. As such, when a buyer's pre-existing resources are highly valuable, and thus more vulnerable to use by the supplier outside of the arrangement, a non-renegotiable closed-price contract is more efficient. Additionally, limited disclosure policies and informal agreements based on repeated interactions complement indirect governance via price contracts.

We explore the relationship between the volatility of a firm’s local environment and its organizational structure. Using micro-level data on managers working for a large retailer, we empirically test and provide support for our theory that a more volatile local environment results in more decentralization only when the need for coordination among subunits is low. In contrast, more local volatility is associated with more centralization when coordination needs are high. Our evidence supports the argument that centralized organizations are better at adapting to local shocks when coordination is important. (JEL D22, L23, L81, M11, M54)