On the Optimality of Outsourcing when Vertical Integration can Mitigate Information Asymmetries

Patrick W. Schmitz

No 15970, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: Consider a buyer and a seller who have agreed to trade an intermediate good. It is ex-post efficient to adapt the good to the prevailing state of the world. The seller has private information about the costs of adapting the good. In the case of non-integration, the buyer has no possibility to verify claims that the seller makes about her costs. In the case of vertical integration, the buyer can verify evidence about the costs that the seller might be able to provide. Even though we assume no further differences between the ownership structures, it turns out that the parties may prefer non-integration.

Keywords: Incomplete contracts; Make-or-buy decision; Property rights approach; Private information; Outsourcing (search for similar items in EconPapers)
JEL-codes: D23 D82 D86 L24 M11 (search for similar items in EconPapers)
Date: 2021-03
New Economics Papers: this item is included in nep-com and nep-cta
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Related works:
Journal Article: On the optimality of outsourcing when vertical integration can mitigate information asymmetries (2021)
Working Paper: On the Optimality of Outsourcing when Vertical Integration can Mitigate Information Asymmetries (2021)
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