Information technology, contract completeness, and buyer-supplier relationships

The theory of incomplete contracts has been used to study the relationship between buyers and suppliers following the deployment of modern information technology to facilitate coordination between them. Previous research has sought to explain anecdotal evidence from some industries on the recent reduction in the number of suppliers selected to do business with buyers by appealing to relationship-specific costs that suppliers may incur. In contrast, this paper emphasizes that information technology enables greater completeness of buyer-supplier contracts through more economical monitoring of additional dimensions of supplier performance. The number of terms included in the contract is an imperfect substitute for the number of suppliers. Based on this idea, alternative conditions are identified under which increased use of information technology leads to a reduction in the number of suppliers without invoking relationship-specific costs. We find that a substantial increase in contract completeness due to reduced cost of information technology could increase the cost per supplier even though the cost of coordination and the cost per term monitored decrease. Such an increase in the cost per supplier leads to a reduction in the number of suppliers with whom the buyer chooses to do business. Similarly, we find that if coordination cost is reduced when more information technology is deployed so that the number of suppliers in the buyer's pool increases substantially, the buyer might choose to make the supplier contracts less complete, instead relying on a more market-oriented approach to finding a supplier with good fit.