Effects of performance-based contracts on innovation in inter-organizational relationships

Sumo, Regien A. F. ; Valk, Wendy van der ; Weele, Arjan J. van ; Bode, Christoph

Document Type: Conference presentation
Year of publication: 2014
Conference title: Academy of Management Annual Meeting
Location of the conference venue: Philadelphia, Pa.
Date of the conference: 1.-5.8.2014
Publication language: English
Institution: Business School > Stiftungslehrstuhl für Procurement (Bode 2014-)
Subject: 650 Management
Keywords (English): Innovation ; Contracts ; Inter-organizatinal relationships
Abstract: Recent contributions suggest that a specific type of contract that has intentionally been left incomplete, the performance-based contract (PBC), fosters innovation in inter-organizational relationships. Studies on PBCs are mostly context-specific and have hardly empirically demonstrated their effects on performance outcomes. We study the effects of PBCs on innovation by means of a survey study. More specifically, we investigate how the two main features of PBCs, i.e., low term specificity and rewards being tied to performance (i.e., pay-for-performance), affect incremental and radical innovation using data on 106 inter-organizational relationships from the Dutch maintenance industry. We find that term specificity is inverse-U related to incremental innovation, but not related to radical innovation. Pay-for-performance positively affects both, incremental and radical innovation. Finally, the partner's degree of risk-aversion negatively affects incremental and radical innovation.

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