Vendor and Client Interaction for Requirements Assessment in Software Development: Implications for Feedback Process

We study agency problems that arise when prototypes are used for requirements assessment. The precision with which the prototype helps a client assess his requirements depends on (a) the type of prototype provided by the vendor and (b) the client's feedback effort. The vendor can provide either a neutral or nonneutral prototype: The nonneutral prototype influences the client towards one particular set of requirements that may not be the true requirement, and the neutral prototype allows the client to assess his true requirements. This leads to the vendor's moral hazard problem. The client chooses to exert either the high or low feedback effort after the vendor provides the prototype. Because the effort is unobservable to the vendor, it can lead to the client exerting the low feedback effort: the client's commitment problem. In this paper we develop and discuss the role of the contract payment to provide the vendor with incentives to supply the neutral prototype, as well as for the client to commit to the high feedback effort. In this setting, we also examine the "anchoring" effect, wherein even a high-feedback effort can influence the client more toward a particular set of requirements with the nonneutral prototype. Our results highlight the interplay among the feedback effort, anchoring, and vendor payments.