Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/259886 
Year of Publication: 
2004
Series/Report no.: 
Working Paper No. 2004:13
Publisher: 
Lund University, School of Economics and Management, Department of Economics, Lund
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.
Subjects: 
make-or-buy decision
multitask principal-agent problem
contracting out
JEL: 
D23
L22
L24
Document Type: 
Working Paper

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