Managers’ Perceptions and Microfoundations of Contract Design

In interfirm exchanges such as contracts, transaction cost economics theory (TCE) argues asset specificity, critical for value creation, poses hazards requiring contractual safeguards. TCE assumes actors have foresight to mitigate these even though specificity is typically hard observe, suggesting managers’ impressions may be biased. Taking a microfoundational approach, we explore how individual negotiators form perceptions of optimal and aggregate them firm-level assessment that influenced through negotiation. We then managers actively manipulate their counterpart’s maximize firm’s capture. theorize about when this occur the implications governance, creation/capture, repeated – each which vary from extant predictions. By applying both an expanded bounded rationality assumption (including cognitive distortions) net capture motivation symmetrically, augment contract design research allowing it predict strategic behavior impact exchange outcomes. As result, analysis provides more nuanced understanding intentionally deviate efficient governance