Essays on Contracts and Corporate Governance Structure in the Information Technology Industry

This dissertation consists of three essays that explore contracts and corporate governance structure issues in the information technology (IT) industry. The first essay shows that when the information technology service being provided is critical to the buyer, it is optimal for the buyer and seller to sign flexible contracts that incorporate future renegotiations. The second essay studies contracts for procuring information technology. With a game theoretic model, it shows that when uncertainty unfolds over time and contracts complete in the specification of timing are infeasible (or transaction costs of writing complete contract are prohibitively high), information asymmetry between contracting parties leads to inefficient investment decisions. In particular, premature investments will occur under certain conditions. vi The third essay studies the issue of corporate governance in the technology sector. Shareholders of technology companies can only form beliefs on the financial health of technology firms and rely on the information provided by the firms to update their expectations, while the executives of these firms have access to first-hand information regarding the real potential of the new technology. A multi-period game-theoretical model with asymmetric information-updating process is developed and in equilibrium executives compensated with stocks and stock options will manipulate and untruthfully report the information, causing the public to discount strong companies with superior technologies due to expectations of possible frauds. The evolvement of the information technology industry has been as dramatic as the impacts it has on people's life. Most recently, following the burst of the Internet bubble, the surge of bankruptcies of dot-coms and collapses of telecommunication giants, accounting scandals of many large technology companies have caused a crisis of trust in Corporate America. This dissertation attempts to address these issues in the information technology industry by examining the economic characteristics of new technology. The second chapter studies information technology service contracts. The technology development process is characterized as a stochastic process and when the information technology service being provided is critical to the buyer, it is optimal for the buyer and seller to sign flexible contracts that incorporate future renegotiations instead of contracts with full commitment. Assuming the seller bears the cost of accommodating flexibility, the buyer can purchase " renegotiation right " from the seller ex ante, allowing Pareto-improving contract to emerge as an outcome. The third chapter examines the relationship between uncertainties, timing and contractual choices for information technology procurement. Proper timing in contracts, which has largely been …