The impact of transaction cost economics and competitive factors upon the design of contracts: a study using DEMATEL

Abstract

This study examines the factors that contribute to effective contract design within the context of transaction cost economics. Research streams on contract factors, supply chain factors, environmental factors, and competitive factors were reviewed to arrive at 11 contract factors. Decision-Making Trial and Evaluation Laboratory (DEMATEL) analysed empirical data collected from 17 experts to weight the importance of contract factors. It was found that most important factors are, in order of significance: trust, long-term view and partnership. Competitive factors scored lower than supply chain factors. Incentives, although important, were not the first concern in designing a sound contract. Findings suggest that, instead of protecting opportunism, companies design contracts to promote cooperation and partnership within a buyer-seller relationship. This study concludes by discussing limitations and recommendations.