Essays on contracts and corporate governance structure in the information technology industry

This dissertation consists of three essays that explore contracts and corporate governance structure issues in the information technology (IT) industry. The first essay shows that when the information technology service being provided is critical to the buyer, it is optimal for the buyer and seller to sign flexible contracts that incorporate future renegotiations. The second essay studies contracts for procuring information technology. With a game theoretic model, it shows that when uncertainty unfolds over time and contracts complete in the specification of timing are infeasible (or transaction costs of writing complete contract are prohibitively high), information asymmetry between contracting parties leads to inefficient investment decisions. In particular, premature investments will occur under certain conditions. The third essay studies the issue of corporate governance in the technology sector. Shareholders of technology companies can only form beliefs on the financial health of technology firms and rely on the information provided by the firms to update their expectations, while the executives of these firms have access to firsthand information regarding the real potential of the new technology. A multi-period game-theoretical model with asymmetric information-updating process is developed and in equilibrium executives compensated with stocks and stock options will manipulate and untruthfully report the information, causing the public to discount strong companies with superior technologies due to expectations of possible frauds.