Title

Incentive mechanism design for alliances

Date of Award

12-2000

Degree Type

Dissertation

Degree Name

Doctor of Philosophy (PhD)

Department

Business Administration

Advisor(s)

Badr Ismail

Keywords

Incentive mechanism design, Strategic alliances, Alliance contracts, Agency

Subject Categories

Business Administration, Management, and Operations | Strategic Management Policy

Abstract

In this study I develop a theoretical framework to address control issues relating to contract design and choice of performance measures in strategic alliances. Strategic alliance formation has been one of the most notable business trends in recent times. Yet, despite nearly an exponential growth, alliances are characterized by high failure rates. with estimates suggesting that as many as sixty per cent of all alliances fail (Spekman et al., 1998).

The extant literature has focused on alliance formation, partner search, partner selection and value creation in alliances, but little work has been done on coordination and control and the investment/resource allocation decisions. This study investigates the role of alliance contracts and agreements in inducing required efforts/contributions from alliance partners. Formal agreements provide control and reporting mechanisms through which firms structure their interactions. Therefore, careful design of alliance contracts becomes an important consideration for alliance success.

One of the contributions of this research is the development of a framework to analyze alliance agreements. To my knowledge this is the first study to address the micro-level analysis of contractual parameters in alliances. The research investigates two commonly found performance measures in the context of alliances, namely performance measures based on an intermediate signal and an alliance output signal. The choice of a performance measure is shown to influence effort contributions of alliance firms. For example, the choice of the common alliance output as the performance measure might lead to free riding from an alliance partner. In addition, it is shown that the value of a performance measure is not only defined by its own characteristics such as its sensitivity, precision and congruence, but also by the structure of the organizational design. Finally, it is shown how multiple performance measures can be optimally aggregated to form a single performance measure.

Another contribution of this research is that for a specific alliance structure I illustrate how full participation from alliance firms can be induced through appropriate incentive schemes. Since an alliance can disband at any time, a partner who contributes an important resource faces the danger of losing the competitive advantage if other firms in the alliance can easily learn or transfer this resource and abandon the alliance. Here I show how different parameter values influence an alliance firm's decision to induce full participation in alliance production. A surprising result is that with full participation from an alliance firm the dominant firm will also increase its alliance contribution.

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