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The Effect of Industry Life Cycles and Strategic Alliances on Employment Contract Modeling

This paper analyses what kind of employment contract must be offered to the manager (agent) of a company by the owner (principal) in the case of strategic alliance formation by taking into consideration their industry life cycles. Agency problem may arise between managers and principals because managers’ actions may not be intrinsically unobservable in strategic alliances. A set of proposals and models is suggested mainly based on the various levels of uncertainty prevailing in the industry. Overall, the shows that in mature stages of the industry, principals are better off by offering the contract where agents receive a fixed payment (i.e. the first best solution), whereas in growth stages agents get fixed payments with additional performance pay (i.e. the second best solution). In both cases the principals get the residual outcome.