This dissertation is structured to provide three essays on contract design decisions in U.S. federal agencies: the importance of contract design, the influence of transaction costs and resource dependence on contract duration, and the bargaining risks and contract type decision.
Prior to the three empirical studies, it first develops a theoretical model of contract designs by synthesizing two theoretical foundations – transaction costs economics and resource dependence theory. Unlike the model with single perspective, the synthesized model allows to investigate not only public managers’ rational attempts in contract design decisions but also the probable influence of external service providers on contract design decisions. In testing this theoretical model, this dissertation further takes into account the institutional context, the federal rules and regulations that govern contract design decisions. Two of three empirical studies are organized to test the model, while the other one is to provide general, descriptive insights into the studies.
Together, the three empirical analyses provide several important findings. First, the federal government’s contract designs reflect contract managers’ attempt to rationally design contracts. Under optimal bargaining situations where the levels of transaction costs are low, contract managers choose the contract designs that minimize production costs. They choose the contract designs that minimize transaction costs when the levels of transaction costs are high.
However, the analyses also show that contract managers’ rational decisions are largely contaminated under the situations where they are dependent on service providers. Three bargaining risks – asset specificity, resource scarcity and resource importance – create governments’ dependence on the provider, thereby increasing vendors’ bargaining power. As a result, governments’ contract designs typically reflect vendors’ preference under the unfavorable resource dependence situations.
Finally, agency discretion and experience also affect contract design decisions. The analysis results demonstrate that under the resource dependence situations, the federal agency that operates under a more permissive regulation uses the contract designs that vendors typically prefer more frequently than the other agencies. This implies that the agency may be more vulnerable to vendor’s influence on contract designs. Additionally, the analysis for the agency with limited contracting experience shows similar results, suggesting that the agency with limited experience may also be vulnerable to vendors’ influence.