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In prior work, GAO found that contractors were paid billions of dollars in award fees regardless of acquisition outcomes. In December 2007, the Office of Management and Budget (OMB) issued guidance aimed at improving the use of award fee contracts. GAO was asked to (1) identify agencies’ actions to revise or develop award fee policies and guidance to reflect OMB guidance, (2) assess the consistency of current practices with the new guidance, and (3) determine the extent agencies are collecting, analyzing, and sharing information on award fees. GAO reviewed the Departments of defense (DOD), Energy (DOE), Health and Human Services (HHS), and Homeland Security (DHS) and the National Aeronautics and Space Administration (NASA)-agencies that constituted over 95 percent of the dollars spent on award fee contracts in fiscal year 2008.

The purpose of this paper is to examine whether reputation element affects the decision relative performance of trust, bonus and incentive contracts using social laboratory experiments.

The study conducts the following lab experiments bonus–incentive treatment without reputation, bonus–incentive treatment with reputation and trust–incentive treatment with reputation.

The study finds that the reputation and fairness concerns, in contrast to self-interest, may have a decisive impact on the actual and optimal choices in the reciprocity-based contracts. The principal pays higher salaries in the bonus contract as compared to an incentive contract.

The study contributes to the behavioral economic literature in the following dimensions. The existing literature on lab experiments considers a bonus contract as better than the debt contract; however, it does not consider the trust contract better than the debt contract.

The construction industry has long been criticized for unethical conduct. The owner usually manages the contractor's opportunistic behaviors by employing a professional supervisor, but there is a risk of covert collusion between the supervisor and contractor. Based on the principal–agent theory and collusion theory, this paper aims to investigate optimal collusion-proof incentive contracts.

This paper presents a game-theoretic framework comprising an owner, supervisor and contractor, who interact and pursue maximized self-profits. Built upon the fixed-price incentive contract, cost-reimbursement contract, and revenue-sharing contract, different collusion-proof incentive contracts are investigated. A real project case is used to validate the developed model and derived results.

This paper shows that the presence of unethical collusion undermines the owner's interests. Especially, the possibility of agent collusion may induce the owner to abandon extracting quality information from the supervisor. Furthermore, information asymmetry significantly affects the construction contract selection, and the application conditions for different incentive contracts are provided.

This study still has some limitations that deserve further exploration. First, this study explores contractor–supervisor collusion but ignores the possibility of the supervisor abusing authority to extort the contractor. Second, to focus on collusion, this paper ignores the supervision costs. What's the optimal supervision effort that the owner should induce the supervisor to exert? Finally, this paper assumes that the colluders involved always keep their promises. However, what if the colluders may break their promises?

Several collusion-proof incentive contracts are explored in a project management setting. The proposed incentive contracts can provide the project owner with effective and practical tools to inhibit covert collusion in construction management and thus safeguard construction project quality.

This study expands the organization collusion theory to the field of construction management and investigates the optimal collusion-proof incentive contracts. In addition, this study is the first to investigate the effects of information asymmetry on contract selection.

All that we know about the Chief Executive Officer (CEO) labour market in China comes from the studies of public listed companies and State-owned Enterprises (SOEs). This is the first attempt to examine the operation of the CEO labour market across all industrial sectors of the Chinese economy. We find that the influence of the State extends beyond SOEs into many privately owned firms. Government is often involved in CEO appointments in domestic firms and, when this is the case, the CEO has less job autonomy and is less likely to have pay linked to firm performance. Nevertheless, we find that incentive schemes are commonplace and include contracts linking CEO pay directly to firm performance, annual bonus schemes, the posting of performance bonds, and holding company stock. The elasticity of pay with respect to company performance is one or more in two-fifths of the cases where CEOs have performance contracts, suggesting many face high-powered incentives. We also show that State-owned and domestic privately owned firms are more likely than foreign-owned firms to use incentive contracts.

The purpose of this paper is to explore the effects of varying motivation induced by financial incentives and common uncertainty caused by time pressure on audit judgment performance.

The experimental method is used to examine how financial incentives and time pressure affect audit performance, based on predictions by both economic and behavioral theories. The relative performance contract and the profit sharing contract are two incentive schemes considered. To achieve the incentive effect on subjects when conducting the experiment, all subjects were compensated with real cash rewards, according to their incentive contracts as randomly assigned.

As predicted, major results show that both incentive contract and time pressure affect audit judgment performance. The audit performance is generally better under the relative performance contract than under the profit sharing contract. Additionally, it is demonstrated that an increase in the level of time pressure significantly improves recall, recognition, and total efficiency under both types of incentive contracts, but impairs recall and total performance, particularly under the relative performance contract. Moreover, the reduction of recall and total performance under the relative performance contract is significantly greater than under the profit sharing contract. Nevertheless, in this case, the relative performance contract still outperforms the profit sharing contract.

The findings suggest the relative superiority of the relative performance contract in comparison with the profit sharing contract in improving auditors' judgment performance for structured tasks.

The relative performance contract would motivate junior auditors to exert more effort to increase their performance in the work environment of increased time pressure. The audit firms may incorporate relative performance evaluations into incentive schemes, to improve junior auditors' performance for structured tasks.

The paper is of value to audit firms in the design of performance‐contingent incentive contracts.

The purpose of this paper is to investigate the impact of incentive contracts in multi-partner project teams (MPPTs) on the agents’ effort expenditure and project performance, analyze how the agents allocate their efforts between production and cooperation and offer suggestions for project managers on how to design incentive contracts.

The paper proposes a model of MPPT in which agents are inequity-averse and their effort expenditures are exogenously bounded. An extensive numerical example is presented in online Appendix 2 to illustrate the theoretical results.

The paper suggests that if the potential benefit of the agents’ cooperation in MPPT is high or if both agents exhibit inequity aversion and the efforts’ marginal costs are low, then group-based incentive contracts outperform individual-based incentive contracts. It also shows that the impact of the incentive contract on the agents’ effort expenditure and project team performance is correlated with several critical project attributes.

Fulfilling a need to study the design of incentive structures in MPPTs, the paper complements the existing literature in three ways. First, in contrast to single-partner project teams, it considers projects with multiple partners where cooperation between them enhances the project outcome. Second, rather than focusing on individual production problems, it considers multi-task projects with constrained efforts that must be allocated between production and cooperation. Third, it analyzes the effects of changes in the project attributes, incentive intensities and information transparency on the effectiveness of the contract.

The purpose of this paper is to investigate the effects that the framing of contractual performance incentives have on supplier’s behavioural and relational responses and on the buyer–supplier relationship.

The authors conducted three in-depth case studies of contractual relationships, which exhibit differences in terms of how performance incentives are framed, i.e., using promotion, prevention and “hybrid” frames, respectively. The study involved 38 semi-structured interviews and content analysis of contract agreements.

First, while promotion-framed incentives lead to positive supplier responses and improved relationships, prevention-framed incentives result in negative responses and deteriorating relations. Second, hybrid-framed incentives can lead to productive supplier responses when positive ex ante expectations are met, although the creation of such positive expectations in the first place depends on the proportionality of bonus and penalty elements. Third, promotion- and hybrid-framed incentives do not by default lead to positive effects, as these are contingent on factors pertaining to contractual clarity. Fourth, the overarching purpose of the contract moderates the effects of contract framing on supplier responses.

The study contributes to contracting research by showing how the framing of performance incentives influences supplier behavioural and relational responses. It also extends the existing literature on contract framing by examining the effects of hybrid-framed incentives, and stressing that contract framing should be considered in joint with the clarity and overall purpose of the contract to elicit desired supplier behaviours.

Managers of buying firms may differentiate their approach to contract framing depending on the type of supplier relationship in focus. Furthermore, effective design of promotion- and hybrid-framed incentives requires attention to: realistic performance targets (on the short, medium and long term); salient bonuses related to these targets; incentive structures that appropriately balance rewards and risks; and: mechanisms that explicate and consider uncontrollable factors in the calculation of bonus–malus payments.

The paper extends the literature stressing the psychological impact of contracts on buyer–supplier relationships by highlighting that contractual clarity and the overarching purpose of the contract moderate the effects of contract framing on supplier behavioural and relational responses.

To minimize customer churn, many service providers offer consumers the option of automatic contract renewal at the end of a contract period. Such agreements are known as rollover service contracts (RSCs). This research quantifies the effect of RSCs and other related factors, such as incentives, on consumers' service choice decisions.

The study adopts choice-based conjoint analysis to assess the effect of RSCs on consumers' choices and to determine whether effect size varies when selecting a cell phone network or gym/leisure club provider, which represent lower-priced utilitarian and higher-priced hedonic services.

It was found that RSCs produce negative perceptions and intended behaviors for the majority of consumers across different product types. Nevertheless, as explained by social exchange theory, many individuals may be persuaded to enter into a RSC on the basis of reciprocity if they are offered an incentive such as a price discount or free product add-on.

In the marketing domain, this is the first comprehensive study to quantify the role of contract type among a range of other factors in consumers' decision-making when selecting a service. The authors' results offer context-specific implications for service marketers. First, RSCs are perceived more negatively in high-priced hedonistic categories, especially among those with lower incomes. Second, price discounts are more effective than product add-ons for motivating hedonic purchases, while product add-ons work better with utilitarian services.

This study examines the economic consequences of non-financial measures of performance in contracts between health maintenance organizations (HMOs) and primary care physicians (PCPs). HMOs have expanded contractual arrangements to give physicians not only financial incentives to control costs, but also to make the physicians accountable for the quality of patient care. Specifically, we examine how quality provisions in HMO–PCP contracts affect utilization (patient length of stay in the hospital), patient satisfaction, and HMO costs. Our results show that quality clauses are associated with a statistically significant increase in utilization (29 more hospital days annually per 1,000 HMO enrollees). Further, inclusion of quality clauses in PCP contracts also led to a significant increase in patient satisfaction, but no associated increase in HMO costs. Overall, these results suggest that quality clauses in PCP contracts can increase value by increasing customer satisfaction without significantly increasing cost.

This study is aimed to explore the dynamic performance incentive model for a flexible PPP contract to handle uncertainties based on supervision during the long-time concession period, so as to ensure operation performance and benefits of the public sector while protecting the economic benefit of the private sector, thus avoiding unnecessary renegotiation.

The microeconomic and principal–agent theories and relevant studies on the basic incentive model and flexible contract are fully utilized. The procedure for developing the dynamic incentive model and the assumptions about the quantitative relationships among fundamental variables or factors are first proposed. The static incentive model without incentive parameter adjustment and then the dynamic incentive model allowing incentive parameter adjustment are successively developed. Finally, the propositions regarding the valid adjustment ranges of the incentive parameter with respect to the economic, social and hybrid benefits of the public sector and the economic benefit of the private sector are suggested.

The dynamic incentive model enables to achieve a flexible contract to handle uncertainties on the PPP project to ensure the benefits of the public sector while protecting the benefit of the private sector. The economic, social and hybrid benefits of the public sector and the economic benefit of the private sectors can be respectively realized through adjusting the reward–punishment coefficient under different adjustment ranges and different importance. The incentive model is able to ensure the benefits of the public sector while protecting the benefit of the private sector by controlling the private sector's effort level unknown to the public sector.

The dynamic incentive model helps implement a flexible PPP contract to handle uncertainties during the operation period, thus controlling the effort level of the private sector and ensuring the benefits of the public sector while protecting the economic benefit of the sector. It enables to clarify the quantitative relationships between the operation performance, the benefits of the stakeholders, the effort level of the private sector and the reward–punishment coefficient. This study contributes to the domain knowledge of the incomplete contract theory for designing a flexible PPP contract with dynamic incentive and supervision mechanism by applying the microeconomic and principal–agent theories.