Managing Co-Creation in Information Technology Projects: A Differential Games Approach

We study the relationship between a client and a vendor in value co‐creation environments such as information technology projects. We consider that the client gets utility from the project throughout the development period and that the effort levels are not verifiable if not monitored. The output is contingent on the effort levels of each party, and we allow these effort levels to be dynamic. Hence, the client needs to optimally decide the terms of payment structures so as to maximize her net value. We analyze the performance of different payment structures and find the best one for the client in diverse settings. We show that the remaining time of the project and the client’s valuation of the project regulate the behavior of the effort levels and some other characteristics in the collaboration. We derive the conditions under which the client chooses not to monitor the vendor’s effort and operates in a double moral hazard environment. In addition, we find that the equilibrium effort levels or the values the parties gain from the collaboration do not necessarily increase when the output becomes more sensitive to either party’s effort. Based on the results of our model, we present several other managerial insights.