Strategic outsourcing and optimal procurement

Frank Rosar

International Journal of Industrial Organization, 2017, vol. 50, issue C, 91-130

Abstract: I study a procurement problem where each seller can ex ante decide to become an intermediary by outsourcing production to a subcontractor. Production costs are independently distributed and privately learned by the producer in each supply chain. I provide a rationale for outsourcing that relies on procurement and subcontracting mechanisms being designed in a sequentially rational way but not on cost savings. I show how my rationale extends to the case with cost savings and I discuss the sellers’ incentives to engage in nested outsourcing. The driving force behind my rationale is that outsourcing makes the distribution of a seller’s cost of providing the product more dispersed. I explain also how my analysis extends to problems where such a dispersion arises for other reasons than outsourcing.

Keywords: Procurement; Outsourcing; Subcontracting; Auction; Mechanism design; Asymmetric information (search for similar items in EconPapers)
JEL-codes: C72 D44 D47 D82 L23 (search for similar items in EconPapers)
Date: 2017
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:indorg:v:50:y:2017:i:c:p:91-130

DOI: 10.1016/j.ijindorg.2016.11.001

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