Monitoring is applied in time-and-materials and revenue-sharing contracts to address the issue of non -observability of vendor's development effort in software outsourcing. We establish a stylized model to investi-gate the impacts of monitoring on the client's contract choice. Under the exogenous monitoring level, the client's contract choice depends on its bargaining power in the negotiation of revenue-sharing. Under the endogenous monitoring level, a time-and-materials contract becomes preferable. Although revenue-sharing contract in-centivizes more vendor's effort, it also pushes the vendor to inflate the effort, leading to a higher monitoring level. Finally, the benefit of the stronger effort is dominated by the higher monitoring cost.
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