Contract renegotiation and bargaining power: Evidence from IT-related outsourcing agreements

Abstract

Contract theory suggests that bargaining power affect contract negotiation and design. Most of contracting research studied the role of bargaining power in initial contract design but ignore its effects on ex post renegotiation. To fill this research gap, we empirically examine the effects of client's bargaining power on contract design and ex post renegotiation using a dataset of 945 IT outsourcing agreement. We found that client firm's bargaining power was influential in different stages of contract negotiation, providing evidences to support the theory. We also found that the timing of renegotiation was also an important factor determining ex post renegotiation. © 2012 ACM.