Design and Analysis of Software Outsourcing Contract Considering the Impact of Service Investment on the Development Environment

When implementing software outsourcing, client companies face moral hazard problems caused by the unobservable efficiency parameters that reflect the degree of development difficulty. To address this issue, a software outsourcing contract is designed based on principal-agent theory, with the objective of maximizing the client's expected returns. The analysis also examines the nature of the contract, considering the impact of service investment on the development environment. The study finds that the marginal cost of developers is negatively correlated with the coefficient of the impact of effort on the number of software bugs, and is positively correlated with the coefficient of the impact of efficiency parameters on the number of software bugs and the sensitivity of client companies to software bugs. The developer's effort is an increasing function of the efficiency parameter.