Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/259980 
Year of Publication: 
2010
Series/Report no.: 
Working Paper No. 2010:2
Publisher: 
Lund University, School of Economics and Management, Department of Economics, Lund
Abstract: 
The make-or-buy decision is analyzed in a simple two-task principal-agent model. There is a cost-saving/quality tradeoff in effort provision. The principal faces a dichotomous choice between weak ("make") and strong ("buy") cost-saving incentives for the agent; the dichotomy is due to an incomplete-contracting limitation necessitating that one party be residual claimant. Choosing "buy" rather than "make" leads to higher cost-saving effort and -- in a plausible "main case" -- to lower quality effort; this in spite of stronger direct quality-provision incentives in the former case.
Subjects: 
make-or-buy decision
manipulation
outsourcing
JEL: 
D23
L24
L25
Document Type: 
Working Paper

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