Strategic Alliance and Employment Contract Designs: The Effect of Industry Life Cycles
Global Economics and Management Review, April 2010
25 Pages Posted: 6 Aug 2007 Last revised: 7 Jun 2017
Date Written: April 1, 2010
Abstract
We investigate what kind of employment contract must be offered to the manager (agent) of a company by the owner (principal) in the case of strategic alliance formation by taking into consideration their industry life cycles. Agency problem may arise between managers and principals because managers’ actions may not be intrinsically unobservable in strategic alliances. Set of propositions and models are suggested mainly based on the various levels of uncertainty prevailing in the industry. Overall, we model that in mature stages of the industry principals are better off by offering the contract where agents receive a fixed payment (i.e. the first best solution).Whereas in growth stages agents get fixed payments with additional performance pay (i.e. the second best solution). In both cases the principals get the residual outcome.
Keywords: Agency theory, strategic alliances, employment contract designs, industry life cycles
JEL Classification: J33, L23
Suggested Citation: Suggested Citation