Contract Form and Technology Adoption in a Network Industry

We investigate the relationship between technology adoption and contractual form in a network industry. We have constructed a novel data set tracking contract forms for outsourcing relationships between major U.S. airlines and their regional airline subcontractors. Beginning in the late 1990s, there is a dramatic change in the nature of contracts in this industry with fixed price contracts replacing revenue sharing contracts as the predominant contractual form. Moreover, this change is correlated with the adoption and diffusion of a new aircraft technology, the regional jet (RJ). We explore possible explanations for this change in contractual form. Our results suggest that the adoption of RJs resulted in new types of routes being subcontracted to regionals and that these routes had characteristics that favored a fixed price contract. Moreover, even after controlling for technology, this correlation between route characteristics and contract form still exists. We thank Bob Gibbons, Avi Goldfarb, Ig Horstmann, Joanne Oxley, Brian Silverman, and seminar participants at Harvard, the University of California, San Diego and at the University of Southern California for helpful conversations. Trevor Tombe provided excellent research assistance. Lederman gratefully acknowledges financial support from the Social Science and Humanities Research Council of Canada.