Creative contracts in advertising industry

Abstract

The cooperation between advertisers and advertising industries in the creative industry has always been haunted by inefficiencies of excessive and repeated revision requests of advertisers. This thesis focuses on the inefficiencies in the advertising industry, and aims to analyze the reason for advertisers’ persistent request for repeated revisions. Based on the classical principal – agent model, this thesis proposes a bilateral moral hazard model with subjective evaluation to explain this phenomenon, and suggests how the industrial mechanism of “Trust is Gold” contributes to solve the repeated revision problem. The thesis first conducts questionnaire survey and interviews in the advertising industry to document the characteristics of the principal – agent relationship between advertisers and advertising agencies. The results show that advertisers and agencies rarely specify a limit for revision times in the contract, and most agencies need to revise the creative proposal for more than five times in a project. The questionnaire results and interview excerpts both reveal that an important reason for excessive reviews is that the advertiser / principal fail to put in enough effort. The thesis then establishes a bilateral moral hazard model to analyze the principal – agent relationship in subjective evaluation situations for advertising industries. Through comparative static analysis, the thesis shows that principals and agents will inevitably encounter at least one of the consequences: excessive reviews, procrastination, and surplus destruction. Finally, the thesis proposes an industry practice named “Trust is Gold” to provide a practical solution to the repeated revision problem, and proves that this mechanism is helpful in solving the revision problems.