A Trickle-Down Theory of Incentives with Applications to Privatization and Outsourcing

Fredrik Andersson ()

No 784, Working Paper Series from Research Institute of Industrial Economics

Abstract: The make-or-buy decision is analyzed in a three-layer principal-management-agent model. There is a cost-saving/quality tradeoff in effort provision. The principal chooses between employing an in-house management and contracting with an independent management; the cost-saving incentives facing the management are, endogenously, weaker in the former case. Cost-saving incentives trickle down to the agent, affecting the cost-saving/quality trade-off. It is shown that weak cost-saving incentives to the management promote quality provision by the agent, and that a more severe quality-control problem between the principal and the management, as well as a higher valuation of quality, make an in-house management more attractive.

Keywords: Make-or-buy decision; Multitask principal-agent problem; Outsourcing (search for similar items in EconPapers)
JEL-codes: D23 L22 L24 (search for similar items in EconPapers)
Pages: 28 pages
Date: 2009-01-07
New Economics Papers: this item is included in nep-bec and nep-cta
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Related works:
Working Paper: A Trickle-Down Theory of Incentives with Applications to Privatization and Outsourcing (2004)
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Persistent link: https://EconPapers.repec.org/RePEc:hhs:iuiwop:0784

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