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

Fredrik Andersson ()

No 2004:13, Working Papers from Lund University, Department of 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 faces the choice between employing an in-house management and contracting with an independent management; the cost-saving incentives facing the management are weaker in the former case. Cost-saving incentives trickle-down to the agent, affecting the cost-saving/quality tradeoff. It is shown that: weak cost-saving incentives to the management promotes quality if it is hard enough to meaurse; a more severe quality-control problem between the principal and the management, as well as a higher valuation of quality, makes an in-house management more attractive.

Keywords: make-or-buy decision; multitask principal-agent problem; contracting out (search for similar items in EconPapers)
JEL-codes: D23 L22 L24 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-com
Date: 2004-03-24
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Working Paper: A Trickle-Down Theory of Incentives with Applications to Privatization and Outsourcing (2009) Downloads
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